Preamble

The House met at half-past Two o'clock

PRAYERS

[Mr. SPEAKER in the Chair]

PRIVATE BUSINESS

MANCHESTER CORPORATION BILL

Read the Third time and passed.

Oral Answers to Questions — GENOCIDE CONVENTION

Mr. W. T. Williams: asked the Secretary of State for Foreign Affairs whether he will now announce the result of his consideration of the question of United Kingdom accession to the Genocide Convention.

The Minister of State for Foreign Affairs (Mr. George Thomson): The consideration of this question has not yet been completed. I have, therefore, nothing to add at this time to the Answer I gave to my hon. Friend on 1st March.

Mr. Williams: Why does the Minister stop at 1st March when this matter has been before this and former Governments for the last 14 years? Are Her Majesty's Government content to stay in the company of the more unattractive members of the United Nations? Is it not time that something was done about this matter?

Mr. Thomson: I am aware that this matter has been the subject of Questions in the House for the last 14 years, as my hon. and learned Friend said. However, the present Government have had the responsibility of facing this problem only in recent months. We are giving the matter very careful consideration indeed, but complex issues are involved and they need consultation.

Mr. Peter Thomas: Does the Minister of State agree that one of the most complex issues is that of political asylum, and has he anything to say about that?

Mr. Thomson: It is one of the difficulties. Successive Governments have always made it clear that they have freely accepted the spirit of the Convention and have supported its objects. In 1962, for example, the complex difficulties were laid very fully before the House. These difficulties are now being re-examined and we will report back to the House as soon as possible.

Sir B. Janner: Would my hon. Friend give an assurance that he will give an answer on this issue very shortly? Is he not aware that the prevailing attitude of the Government has been the attitude of Governments in Britain for very many years and that many people, not only in this country but in other Commonwealth countries some of which have accepted the Convention, cannot understand why we should be standing aside on this matter? Will my hon. Friend give it his immediate attention?

Mr. Thomson: I made it clear that this country has always accepted the spirit of the Convention. Perhaps we are rather more scrupulous than are some in implementing conventions where there are legislative difficulties. One difficulty in fully acceding to the Convention is that to do so would probably imply legislation, and this is one of the matters which is now being actively studied.

Oral Answers to Questions — PEOPLE'S REPUBLIC OF CHINA (EXCHANGE OF AMBASSADORS)

Mr. Freeson: asked the Secretary of State for Foreign Affairs if he will now initiate further negotiations to seek an exchange of ambassadors between the United Kingdom and the People's Republic of China.

The Minister of State for Foreign Affairs (Mr. Walter Padley): No, Sir. As I told my honourable Friend on 10th May, we have proposed this to the Chinese and been refused and I have no reason to suppose their position has since changed.

Mr. Freeson: With respect, that is not satisfactory. As it is now about eight months since the Government made this proposition—for which, of course, we should be glad, although we regret that the Chinese did not take it up—should we not seek to alter the position? Will


my hon. Friend reconsider the matter and not leave things standing as they are in regard to our relations with a quarter of the world's population?

Mr. Padley: No, Sir. We have made the position clear to the Chinese Government that we should like an exchange of ambassadors. Their reply up to now has been, "No". If there is a change of heart in Peking we shall be very glad.

Oral Answers to Questions — CHINA (UNITED NATIONS REPRESENTATION)

Mr. Freeson: asked the Secretary of State for Foreign Affairs if he will now initiate further negotiations to seek the admission into the United Nations Organisation of the People's Republic of China.

Mr. Hamling: asked the Secretary of State for Foreign Affairs if he will instruct the United Kingdom permanent representative at the United Nations to raise the question of representation of Communist China.

Mr. Lomas: asked the Secretary of State for Foreign Affairs what action has been taken by Her Majesty's Government since October, 1964 to secure the admission of China to the United Nations.

Mr. Padley: This is a matter which must be decided by a vote of the General Assembly. An item urging the "Restoration of the Lawful Rights of the People's Republic of China in the United Nations" was included in October, 1964, in the agenda of the 19th Session of the General Assembly, but the Session was adjourned before the item could be considered and the General Assembly is not expected to meet again before the autumn of this year. When the item was tabled in 1964, our representative was, as in previous years, instructed to vote in its favour. Similar instructions will be issued to him for the next Session of the Assembly.

Mr. Freeson: While thanking my hon. Friend for that reply, or the latter part of it—regrettable as the previous part may have been—may I ask him whether he will be prepared to undertake something more than instructing our representatives to vote for the particular

proposition?—[Laughter.] This is not a laughing matter. Will my hon. Friend initiate negotiations with the other Powers concerned in order that we may stand a better chance of success in the future, particularly bearing in mind the very important rôle that this State, representing one-quarter of the world's population, must, whether we like it or not, play in the world's affairs in the future?

Mr. Padley: All the Governments concerned are well aware of the position of Her Majesty's Government. There will doubtless be a motion to seat China in the United Nations, and our delegate will vote in favour of it.

Mr. Hamling: I thank my hon. Friend for that very clear declaration of the attitude of Her Majesty's Government, but would he agree that at this stage in diplomatic relations in the Far East, the admission of China to the United Nations could do nothing but good?

Mr. Padley: I reiterate that Her Majesty's Government are strongly in favour of the Peking Government taking their seat in the United Nations. As to the broader issue of the international problems of the Far East and South-East Asia, we should certainly like to see a change in the attitude of the Chinese Government equally with regard to the acceptance of an exchange of ambassadors.

Mr. Lomas: Is my hon. Friend aware that there is a growing feeling that it is not sufficient merely to be in support of the entry of China into the United Nations, but a matter of supreme importance that this country should make every effort to try to persuade other nations which have so far sought to exclude that part of the world from the United Nations to take a different view, and to do its very best to get China into the organisation?

Mr. Padley: As a natural part of the diplomatic practice of Her Majesty's Government, we seek to get other countries to share our point of view, and that we shall continue to do.

Mr. Peter Thomas: Whilst I appreciate that Her Majesty's Goverment are following the previous Government's policy, may I ask whether the hon. Gentleman can say whether or not the


People's Republic of China has expressed a wish to join the United Nations?

Mr. Padley: As far as I am aware, the People's Republic of China has not up to now said that it would refuse to be seated if there were a positive resolution of the United Nations. I think that we should all be wise to continue our efforts to secure the admission of the Peking Government to the United Nations.

Oral Answers to Questions — MIDDLE EAST (INFORMATION SERVICES)

Mrs. McKay: asked the Secretary of State for Foreign Affairs to what extent he is satisfied with the quantity and quality of Her Majesty's Government's information services in the Arab countries, Iran and Afghanistan; and what steps he intends to take to improve them.

Mr. George Thomson: Within the limitations of our existing overall budget and manpower, I am satisfied that we are making the best use of the available resources in our information services in the Middle East.
I do not believe we should at present be justified in stepping up our effort in this part of the world at the expense of other areas. But we do, in fact, frequently review the allocation of our resources, and have recently decided to appoint information officers to two further Middle Eastern posts at the cost of taking staff from larger embassies in that area.

Mrs. McKay: I thank my hon. Friend the Minister of State for his reply. Nevertheless, I hope that he will take steps to secure an increase in the overseas information Vote sufficient to enable effective presentation of the Government's policy to be made in all Middle Eastern countries, and to foster mutual understanding with a view to enabling a progressive reduction to be made in our expensive military commitments in those areas.

Mr. Thomson: We are anxious, both in the Middle East and in other parts of the world, to make the most effective presentation in every way possible of the policies of Her Majesty's Government,

but any increase in this respect involves an increase in the global amount of money available on the information Vote.

Mr. W. T. Williams: Does my hon. Friend not know that among ordinary folk—in the countries of the Arabian Federation, anyway—there is a good deal of anti-British feeling at the moment; and that the vacuum that has been created by the failure of British propaganda is being filled by United Arab Republic propaganda and German influence? Does he not feel that these are matters that require the serious attention of Her Majesty's Government?

Mr. Thomson: Yes, Mr. Speaker. I am aware that there is a good deal of critical feeling of Her Majesty's Government's policies in the Middle East, and I believe that that critical feeling is almost always based on misunderstandings of our policy, which our information services do their best to remove. I would pay tribute to the work that our regional information office does in Beirut. In the face of considerable difficulties, it does excellent service on behalf of the country.

Lady Tweedsmuir: What is the total budget for this area for last year and, as the Minister of State said that there was to be a reorganisation there, what is proposed in the coming year?

Mr. Thomson: I am sorry, but I could not give that information without notice. If the noble Lady likes to put down a Question I shall, of course, answer it.

Oral Answers to Questions — DISARMAMENT

Viscount Lambton: asked the Secretary of State for Foreign Affairs what actions have been taken by the Minister of Disarmament towards achieving disarmament.

Mr. Blaker: asked the Secretary of State for Foreign Affairs what new proposals Her Majesty's Government have with regard to disarmament.

Mr. Eldon Griffiths: asked the Secretary of State for Foreign Affairs if he is satisfied with the progress being made in preparing for another Geneva Disarmament Conference; and if he will make a statement.

Mr. Philip Noel-Baker: asked the Secretary of State for Foreign Affairs what new proposals Her Majesty's Government have laid before the United Nations Disarmament Commission for implementing the freeze of nuclear weapon delivery vehicles proposed by President Johnson.

The Secretary of State for Foreign Affairs Mr. Michael Stewart): As the House is aware, Her Majesty's Government have played a full part in the discussions at the United Nations Disarmament Commission in New York, which ended its Session on 16th June. Before it closed, the Commission adopted a Resolution which called, amongst other things, for the Eighteen-Nation Disarmament Conference at Geneva to "reconvene as early as possible". It is our view that the Geneva Conference is the most experienced and business-like body for detailed consideration of disarmament questions, and the one most likely to be able to make progress towards agreement on the measures under discussion. We hope that it will prove possible to agree on an early date for a resumption of the Geneva Conference.
As regards the proposed freeze on nuclear delivery vehicles, we should like to see progress made towards agreement on President Johnson's proposal. This is a measure which we think might be combined with the destruction of some of these weapons. We hope that there will be detailed discussion of these ideas as soon as the Geneva Conference reassembles.

Viscount Lambton: With great respect, the Foreign Secretary does not seem to have answered the Question. I asked what the Minister of Disarmament does when these conferences are not taking place? Will he also say what was the purpose of the visit of the Minister of Disarmament to the Scandinavian countries? Was it his intention to disarm them?

Mr. Stewart: Perhaps the noble Lord will put down the last part of his supplementary question as a Question on the Order Paper. In general, the work of my noble Friend is to conduct a complete review of disarmament policy. There are a number of fields in which we think an advance could be made, but

they require very detailed study, and on that my noble Friend is engaged.

Mr. Eldon Griffiths: Does the Foreign Secretary agree that the People's Republic of China, in recently exploding nuclear weapons, has not helped in any way towards the efforts now being made by this Government, and by many other Governments, for disarmament? Would he also agree that the Minister of State in another place is certainly one of the most under-employed Members of the Government?

Mr. Stewart: The answer to the first part of the supplementary question is certainly "Yes", and, to the second, equally certainly, "No".

Mr. Noel-Baker: Does not my right hon. Friend agree that the Chinese nuclear explosions make the whole question of disarmament even more urgent than it was before? Has not the Minister of State helped in New York to make a strong demand for the end of the disastrous drift we have had in this matter for the last 13 years? Can the Foreign Secretary say what proposals he has for reforming the Committee of Eighteen, and ensuring that its work shall be more efficient?

Mr. Stewart: The procedure of the Committee of Eighteen is something that the Committee itself decides. We want to see it proceed rather more speedily, but our first task is to get that Committee started, because that is the best instrument we have at the moment for these discussions.

Mr. Maudling: Does the Foreign Secretary recall that last October he and his colleagues were convinced that the time was opportune for a new breakthrough in the disarmament negotiations and that they were going to take an initiative? What has happened to that initiative?

Mr. Stewart: I have explained that there are a number of fields in which we think an advance can be made, but these need careful study and preparation.

Mr. Peter Thomas: Can the right hon. Gentleman tell us whether there is any new field other than the fields which we explored a year and more ago where he thinks that an advance can be made?


If so, could he name one of those fields, because we have had a total absence of any new thinking from the Minister of State for Disarmament, particularly on the United Nations Commission? Will the Foreign Secretary say in regard to the Eighteen-Nation Conference—as it is now June—when he hopes that it will be reconvened because, if we are fortunate, it will soon be time for the General Assembly?

Mr. Stewart: I hope that the conference will be resumed as soon as possible, but, as the hon. and learned Member knows, that is a matter for the Governments of the United States and Soviet Union. The measures we are particularly concerned with are a non-dissemination treaty, the extension of the Test Ban Treaty and a freeze, combined with the destruction of some nuclear vehicles. There are then some larger questions affecting European problems and a reduction in nuclear weapons generally which, as I said, require further study.

Mr. Rankin: Would not my right hon. Friend agree that it would be of the greatest help to disarmament if President Johnson stopped unfreezing his bombs over North Vietnam?

Mr. Stewart: There are Questions on that subject to be asked a little later.

Oral Answers to Questions — CAMBODIA (CONFERENCE)

Mr. Hector Hughes: asked the Secretary of State for Foreign Affairs if he will now make a statement on the correspondence with the Soviet Government on an international conference on Cambodia; and what will be the scope, personnel, time and place of meeting of the conference.

Mr. M. Stewart: A record of the Diplomatic Exchanges concerning the Cambodian Conference and a full explanation of Her Majesty's Government's attitude were given in the White Paper which was published on 3rd June. I have nothing further to add at present.

Mr. Hughes: Does my right hon. Friend realise that I understand all that was in that White Paper? Does he not think that it would be a good idea, having regard to the way in which the situation

of Cambodia affects other Far Eastern countries, to take a leaf out of the Prime Minister's book and pay a visit to Cambodia with a view to bringing about the desired conference?

Mr. Stewart: I congratulate my hon. and learned Friend; it was a long and complex White Paper. I think the Government's position is quite clear on this. It was suggested first by the Cambodian Government, supported by the Soviet Union, that a conference should be held. We fully assented to that view and as soon as the Cambodian Government are prepared to join with us in issuing invitations the conference will be held.

Mr. Maudling: Can the right hon. Gentleman tell us how the prospects of such a conference have been affected by Mr. Gordon Walker's remarks that it would be used for other purposes?

Mr. Stewart: That suggestion has been made more than once by hon. Members opposite. There is no evidence for it at all.

Oral Answers to Questions — POLAND, CZECHOSLOVAKIA AND EAST GERMANY (FRONTIERS)

Viscount Lambton: asked the Secretary of State for Foreign Affairs what is the policy of Her Majesty's Government with regard to a settlement of the frontiers of Poland, Czechoslovakia, and Eastern Germany.

Mr. Padley: As regards Her Majesty's Government's policy on the question of a settlement of the frontiers of Poland and Czechoslovakia, I would refer the hon. Member to the reply which my right hon. Friend the Prime Minister gave to a Question on this subject by my hon. Friend the Member for Manchester, Gorton (Mr. Zilliacus) on 23rd March.
As the hon. Member will be aware from the reply which my right hon. Friend the Foreign Secretary gave to him on 3rd May, Her Majesty's Government do not recognise the existence of a State in East Germany. The question of a settlement of East Germany's frontiers does not, therefore, arise.

Viscount Lambton: The Foreign Secretary on 3rd May said that the Prime


Minister had mentioned these discussions in the statement which the Prime Minister had spoken of on 20th December, 1961, and 5th July, 1962. Is it then the present policy of Her Majesty's Government not to advocate settlement in Eastern Europe for those three countries together and especially for a wider settlement to which the Foreign Secretary referred on 3rd May?

Mr. Padley: Certainly not. While we regret the failure so far to conclude a peace treaty with Germany, which is crucial in this matter, we cannot abandon our treaty commitments or cease to work for a peace settlement and for the possible reunification of Germany. The final determination of Germany's frontier with Poland must await the settlement of the peace treaty. On the question of the Munich Agreement and Czechoslovakia's frontiers, that position was made abundantly clear by the statement which the Foreign Secretary made when he recently visited Prague.

Mr. Peter Thomas: Does this mean that Her Majesty's Government's policy is that the frontier between Czechoslovakia and Germany should remain as it is and that any changes made after 1938 do not apply?

Mr. Padley: The answer to that is "Yes", and that was made abundantly clear by my right hon. Friend in Prague.

Mr. Zilliacus: In view of the fact that at the 1961 Labour Party Conference the policy was adopted by an overwhelming majority on the initiative of the National Executive that we should recognise the existing frontiers of Germany and recognise the existence of a second German State, and as those are the only possible terms on which Germany can be united, and as the present policy is not only unreal but an obstacle to making peace, will my hon. Friend make an effort at last to pay some attention to the policy on which we were elected?

Mr. Padley: Perhaps I might, both as Minister of State and as the Chairman of the Overseas Committee of the Labour Party, repudiate that interpretation of the decision of the 1961 Labour Party Conference.

Oral Answers to Questions — VIETNAM

Mr. Shinwell: asked the Secretary of State for Foreign Affairs, what action is being taken by the United Nations to bring the conflict in Vietnam to an end.

Mr. Hector Hughes: asked the Secretary of State for Foreign Affairs, if he will make a statement on the reports he has received up to date from Mr. Gordon Walker on conditions in Asia; and what steps he has taken during the last two weeks towards a peace settlement in Vietnam.

Mr. A. Henderson: asked the Secretary of State for Foreign Affairs, whether he will make a statement on the progress towards an international conference on the Vietnam conflict.

Mr. Wall: asked the Secretary of State for Foreign Affairs, if he will make a statement about the current position of the cease-fire negotiations in Vietnam.

Mr. Lomas: asked the Secretary of State for Foreign Affairs if he will use the offices of the United Nations in seeking a solution to the situation in Vietnam.

Mr. M. Stewart: Efforts to seek a basis for a peaceful settlement in Vietnam have moved into a new phase with the Commonwealth initiative which was announced on 17th June. In his statement to the House on 17th June, my right hon. Friend the Prime Minister explained the background to the decision that a Commonwealth mission should make contact with those most concerned in the Vietnam conflict. I do not think I can do more in answering Questions on the various possibilities for action over Vietnam than to refer hon. Members to what he then said. We shall now concentrate all our efforts on making this initiative as fruitful as those concerned will allow.

Mr. Shinwell: My right hon. Friend, quite unwittingly, has forgotten what my Question is. I asked him what the United Nations has done in order to secure peace in Vietnam, but he has referred me to the initiative taken by my right hon. Friend the Prime Minister and the Commonwealth Prime Ministers' Conference. Do I understand that the United


Nations fully supports the initiative taken by my right hon. Friend? If so, could we have some publicity about this matter?

Mr. Stewart: Aspects of this dispute, as I think my right hon. Friend the Member for Easington (Mr. Shinwell) knows, have been reported to the United Nations, but the difficulty there has been the refusal of North Vietnam to recognise the jurisdiction of the United Nations in the matter. Since I last answered Questions on this subject in the House, I have pursued further the question of whether anything could be done through the United Nations, but I am afraid that at present that channel does not seem likely to lead to a solution. It was therefore for that reason that I thought it right to stress the initiative we are now taking.

Mr. Shinwell: May I ask my right hon. Friend if he will be good enough to answer my Question? All I want to know is whether the United Nations fully supports the initiative taken by my right hon. Friend.

Mr. Stewart: We have, of course, drawn the attention of the Secretary General to it and I believe he welcomes it, but it has not been put as a formal matter before the Security Council or the General Assembly.

Mr. Hector Hughes: Would it not be desirable and practicable in the events which have happened in the Far East, and events which have not happened in the Far East, to bring Mr. Gordon Walker home for a conference face to face so that Ministers here can realise more closely what is happening there?

Mr. Stewart: I have, of course, discussed with Mr. Gordon Walker since his return the work he did in the Far East.

Mr. A. Henderson: In order to clarify the position, may I ask my right hon. Friend whether he will emphasise the fact that the proposed Commonwealth peace mission has been sponsored by the Commonwealth Prime Ministers' Conference as a whole, for which all Commonwealth members accept responsibility, and is not put forward merely by the member States which are going on the

mission? Secondly, in spite of the ex parte statements made by Mr. Chou en Lai and the North Vietnam Press Agency, rejecting the proposal, may we take it that the Commonwealth mission will press for an official reply from both the Government of China and the Government of North Vietnam?

Mr. Stewart: I would reply "Yes" to both parts of that question. This is a mission of the whole Commonwealth and, setting aside the remarks we have so far seen reported in the Press, we shall press for proper replies from the Governments concerned to the mission's request to visit their capitals.

Mr. Maudling: Can the Foreign Secretary assure the House that the Prime Minister's initiative and the mission will not involve any change in the Government's policy of support for the American position in Vietnam, so clearly set out by himself on many occasions?

Mr. Stewart: The right hon. Gentleman will remember that I have made clear our view that the United States, in the position it was, had to take these military measures. He will remember that I have also said that Her Majesty's Government reserve their right to form and pronounce their judgment on any future events as they occur.

Mr. Wall: While wishing the Prime Ministers well on the peace mission, may I ask the Foreign Secretary whether the mission will go ahead, even if some of the protagonists refuse to meet it?

Mr. Stewart: I do not think it would be suitable to answer hypthetical questions at this stage.

Mr. Orme: In this difficult situation, will my right hon. Friend ask the Americans to cease the bombing of North Vietnam, because this would possibly create a new situation giving rise to an initiative for the peace mission to be successful?

Mr. Stewart: My hon. Friend may have noticed that the mission is already appealing to all parties concerned to show the utmost restraint in military operations as a step towards creating the right atmosphere. I think my hon. Friend would agree that an appeal of that kind must be addressed to all the parties concerned.

Sir F. Bennett: The Foreign Secretary seemed to indicate that the Prime Minister's initiative was the result of a collective decision of the whole Commonwealth Conference. If this is so, will he say why there is not a single prospective or actual Asian member of the mission at present? Would he care to reaffirm now that the mission has the support of the whole Commonwealth including, in particular, Tanzania and Pakistan?

Mr. Stewart: As I have said before, this is an initiative of the whole Commonwealth. The hon. Gentleman may know that it had been hoped to include the Prime Minister of Ceylon, but he is unfortunately unable to come in the mission.

Mr. Speaker: Mr. Dodds-Parker.

Mr. Ennals: On a point of order. My right hon. Friend said that in answering Question No. 8 he would deal with certain other Questions, including No. 37. I attempted to catch your eye, Mr. Speaker.

Mr. Speaker: I heard "47" not "37". I see nods confirming that I am correct.

Mr. Eldon Griffiths: asked the Secretary of State for Foreign Affairs if he is aware of the Chinese Government's official statements that China may intervene in the Vietnam war; and what is the policy of Her Majesty's Government on this matter.

Mr. M. Stewart: Her Majesty's Government are very conscious of all the dangers presented by the situation in Vietnam, and it is for this reason that we have worked unceasingly in the search for a peaceful settlement.

Mr. Griffiths: May I preface my supplementary question by congratulating the Foreign Secretary on the lucidity, courage and intellectual power with which he presented Her Majesty's Government's case on Vietnam at the Oxford Union? [HON. MEMBERS: "Hear hear."] I think all who heard him were proud to hear him speak for this country.
May I now ask him about China and ask whether he would not agree that while we all recognise the importance of China, its attitude on Vietnam has been singularly unhelpful, whether it be in the denunciation of the Commonwealth mission or in its test explosions of bombs in recent months? Would not the right

hon. Gentleman agree that there must be a change in the attitude in the Government of China before we can get peace in Vietnam or anywhere else?

Mr. Stewart: I think I made it clear on several occasions that while we, for our part, have searched many ways in which a peaceful settlement can be reached, we have so far found a barrier in the attitude of China and, indeed, of other Governments, and that a change is needed there. We have got to go on making our own intention and desire for a settlement clear until that change comes.

Mr. Emrys Hughes: Will my right hon. Friend give a definite assurance that in the event of the United States getting involved in a war with China, we will not be involved in it?

Mr. Stewart: I think if my hon. Friend is really thinking in those gigantic terms he may realise that the world might then be in a state in which none of us would be able to control events. We have got to do what we can now to get a settlement of this dispute so that the contingency that my hon. Friend has in mind never a rises.

Mr. A. Royle: Would the right hon. Gentleman confirm that the Government's policy regarding Vietnam remains the same as the policy which he expressed so ably at the Oxford Union last week?

Mr. Stewart: Yes, and perhaps I should make clear, in view of some of the comments that I have seen, that I said nothing at all there that I have not already said in the House, as hon. Members who have heard what I said in the House will already be aware.

Mr. Frank Allaun: Is my right hon. Friend aware that millions of people passionately want the Commonwealth mission to succeed? But, if it is to succeed, is it not clear that the whole of the mission must be non-aligned and, in order to show that to all the countries and parties concerned, must it not be clear that we no longer support the bombing of North Vietnam by the Americans?

Mr. Stewart: No, I do not think I could accept that. This is a Commonwealth mission, and the Commonwealth contains countries which have different views on the history and possibly even


on the best method of settling this problem. What they have in mind is a genuine desire to see if they can find the circumstances in which there could be a conference and discussion, and I think if one said that it had got to be composed entirely of nations which were completely non-aligned on this matter it would not have been representative of the Commonwealth.

Oral Answers to Questions — JORDAN WATERS DISPUTE

Mr. Dodds-Parker: asked the Secretary of State for Foreign Affairs whether he will now name the dispute over Jordan waters at the United Nations Security Council as a threat to peace.

Mr. Jackson: asked the Secretary of State for Foreign Affairs whether he will now instruct the United Kingdom representative at the United Nations to raise the issue of the Jordan waters dispute under Article 24(1) of the Charter to ensure the maintenance of international peace and security.

Mr. George Thomson: I have nothing to add to the reply I gave to the hon. Member for Cheltenham (Mr. Dodds-Parker) on 26th April.

Mr. Dodds-Parker: As there is a lull in this area, owing to the preoccupations of some of the protagonists elsewhere, would not this be a good moment to take an initiative on the Johnson Plan, which I am sure the Minister of State realises was accepted at the time by all the limitrophe Powers?

Mr. Thomson: As I told the hon. Gentleman on the last occasion when he raised this matter in the House, Her Majesty's Government regard the Johnson Plan as a useful guide line in regard to the allocation of the Jordan Waters between the Arab States and Israel, and we will continue to pursue that point of view.

Mr. Jackson: Would not the Minister of State agree that, with the great tension on the Syrian-Israel frontier, it would be valuable in a purely de facto sense to increase the number of United Nations observers along that line so as to minimise the danger of accidental clashes?

Mr. Thomson: As my hon. Friend knows, the Government are generally sympathetic to playing our part in strengthening any of the United Nations peace-keeping operations, and we would certainly support all measures which the U.N.T.S.O. Chief of Star considered necessary for the sufficient execution of the duties of his organisation.

Lady Tweedsmuir: What is the attitude of Her Majesty's Government to President Bourguiba's recent suggestion that in order to ease tension in this area certain United Nations resolutions should be applied, including partition?

Mr. Thomson: That is a wider and rather different question, but Her Majesty's Government have said that they noted President Bourguiba's speech with interest.

Oral Answers to Questions — PERSIAN GULF (MINISTER'S VISIT)

Mr. Dodds-Parker: asked the Secretary of State for Foreign Affairs if he will make a statement on his recent visit to the Persian Gulf.

Mr. George Thomson: It was I, and not my right hon. Friend, who visited the Gulf recently, between 8th and 16th May. My main purpose was to make acquaintance at first hand with personalities and local conditions in this area where Britain has special treaty relationships and important economic interests.
I visited five of the nine protected sheikhdoms on the southern coast of the Gulf. On my way back I was also able to spend a day in Kuwait where I had useful talks with the Prime Minister, and with other Ministers.
During my visit to the States of the Southern Gulf I had detailed discussions with the Rulers and others about the ways in which Her Majesty's Government might give further assistance to promote economic and political advance. The current level of our aid to the Trucial States this year is just under £250,000. Since my return, Her Majesty's Government have offered to contribute to a newly-established Trucial States Development Office and Fund an additional £1 million. We are also anxious to modernise our own relationship with the Gulf States; I discussed various steps we


have in mind whereby we might transfer to them as soon as they are equipped to take them over certain functions involving foreigners which over the years we have come to exercise on their behalf. Finally. I discussed with the local Governments the possibilities for greater cooperation between the States themselves. I have since been glad to note that at the end of May the Deputy Rulers of Bahrain, Qatar and Abu Dhabi, and the Ruler of Dubai—that is to say the four major sheikhdoms in the area—met for the first time together in Dubai to discuss their common problems; among other things they reached agreement on a new unified currency.
May I apologise for the length of my Answer?

Mr. Dodds-Parker: May I congratulate the Minister personally on the success of his visit to that part of the world? I tabled the Question to him, but some fairy transferred it to his right hon. Friend. In view of the increase in subversion from outside into the area, is the Minister of State satisfied that internal security is all ready to take care of any future difficulties which are likely to arise?

Mr. Thomson: It is always dangerous to prophesy about developments in that part of the world, but we have the problem of security in the area very much in mind. As the hon. Gentleman knows, internal security as such is the responsibility of the Rulers and not of Her Majesty's Government.

Mr. Wall: I congratulate the hon. Gentleman on his reply. Will he do all he can to improve the already improving good relations between Britain and Saudi Arabia and between Saudi Arabia and the States he mentioned in his Answer?

Mr. Thomson: Yes. The hon. Gentleman is quite right. Saudi Arabia's interests in this area are very considerable, and we hope to be associated with them in a constructive approach to the problems I have mentioned.

Oral Answers to Questions — EMBASSIES (COMMERCIAL SERVICES)

Mr. Bence: asked the Secretary of State for Foreign Affairs what further

steps he is taking to improve the commercial services of British embassies.

Mr. George Thomson: With the measures announced by my right hon. Friend the President of the Board of Trade on 27th January and 1st June last, the range of official services to exporters is now more comprehensive than ever before. We are continually seeking to improve the services provided by our embassies and consular posts. Recent steps include the revision of the system of training for officers entering commercial work, improved terms of service for locally engaged officers, provision of more office equipment and the institution of a standard filing system for all commercial departments.

Mr. Bence: While thanking my hon. Friend for that reply, may I ask him to consider the fact that American Government agencies and embassies do not merely use their commercial attachés as sources of information? Their commercial attachés and embassies—it is the same with German embassies—are active protagonists for American and German interests. Will my hon. Friend see that our attachés are not merely officers waiting to give information to these people who call but are active in propagating the commercial interests of Britain because of our difficult balance of payments situation?

Mr. Thomson: I will take careful account of what my hon. Friend has said. My impression is that our commercial officers overseas are at least as good as their competitors in other countries. It is the job of the Diplomatic Service officer overseas to help the exporter to sell goods. It is not the job of the officer to sell the goods himself.

Sir G. de Freitas: Apart from improving the service, is my hon. Friend aware that one of the problems facing many of our High Commissioners and Ambassadors is that British businessmen do not appear to be aware of the extent and range of the commercial services available? Will the Minister once again remind organisations such as the F.B.I. of the existence of these services?

Mr. Thomson: Yes, Sir. My hon. Friend has drawn attention to a very important aspect of the matter. To meet


this problem an extensive advertising campaign to inform businessmen of the services is being undertaken.

Mr. Eldon Griffiths: I was glad to hear the hon. Member speak of his desire to improve the training of officers in commercial matters. Will he accept that in many cases the Foreign Office, sometimes due to lack of staff, sometimes finds it necessary to place in commercial posts people who have had almost no training at all in that direction? Will the hon. Gentleman take steps to see that the training that he spoke of is pressed through urgently?

Mr. Thomson: We are very conscious of the importance of training in this matter. We have some difficulties with regard to staff. We do not have as many people in the Diplomatic Service as we should like, but within the limits of manpower we are giving increasing attention to the problem of providing adequate training in these courses.

Oral Answers to Questions — UNITED NATIONS COMMITTEE ON COLONIALISM

Mr. Biggs-Davison: asked the Secretary of State for Foreign Affairs having regard to the financial difficulties of the United Nations, whether Her Majesty's Government will move for the suspension of any further tours abroad by or on behalf of its Committee on Colonialism as a measure of economy.

Mr. George Thomson: Her Majesty's Government do not consider that this would serve any useful purpose. Their attitude to tours abroad by the Special Committee on Colonialism, in the present financial difficulties of the United Nations, has been made clear by the fact that the British representative voted against the present tour on the grounds of the expense involved.

Mr. Biggs-Davison: Could not Her Majesty's Government be more zealous about economy in the United Nations, particularly with regard to its less constructive activities? Can the hon. Gentleman mention one piece of informed and useful advice that Her Majesty's Government have received from this Committee on the administration of dependent territories?

Mr. Thomson: On the question of economy in the work of the United Nations, I think that the amount of money spent on the United Nations in pursuing its constructive purposes is infinitesimally small compared to the amount of money that the nations devote to armaments. One has got to see it in that perspective.

Sir Knox Cunningham: Can the hon. Gentleman give the House the cost of the recent trip by this Committee and can he say what countries paid for it?

Mr. Thomson: Yes, Sir. The Secretary-General has estimated the cost at 109,000 dollars, and the United Nations pays the travelling expenses of the delegates.

Oral Answers to Questions — INDONESIA

Mr. Hamling: asked the Secretary of State for Foreign Affairs what new initiatives he proposes to take with Indonesia to settle outstanding differences.

Mr. Padley: There is little I can add to the Answer given by my hon. Friend the Minister of State to my hon. Friend on 3rd May, and my right hon. Friend the Prime Minister's statement in the Commonwealth and Colonial Affairs Debate on 1st June.

Mr. Hamling: While appreciating that this is largely a matter for discussion between Malaysia and Indonesia, may I ask whether my hon. Friend would agree that our treaty guarantees to Malaysia put us in a very special position and that we could pursue an initiative that could do some good in easing the situation between Malaysia and Indonesia?

Mr. Padley: We certainly recognise our special relationship and, no doubt, the subject will be fully discussed at the Commonwealth Prime Ministers' Conference. We are indebted to the interest shown by Pakistan and Ghana, as well as Japan, Thailand and the Philippines, in seeking to promote a cessation of Indonesia's aggressive attitude towards her neighbour, but in the end this matter depends upon Indonesia ceasing aggression.

Mr. Maudling: The Question referred to settling outstanding differences with Indonesia. Does the Minister regard this


as an adequate description of an instance of naked and unprovoked aggression against a Commonwealth country?

Mr. Padley: As I indicated in one of my replies, we do regard this as unprovoked aggression.

Mr. Philip Noel-Baker: Will my hon. Friend recognise that there is real danger it the continuation of this undeclared war between Indonesia and Malaysia? Will he consider again with his right hon. Friend whether the United Nations cannot be used to bring this to an end?

Mr. Padley: We will certainly consider that. But of course the difficulty is that Indonesia has left the United Nations. The Malaysian Government are keeping the Security Council fully informed, most recently in a letter of 28th May, but I assure my right hon. Friend that we shall keep his view constantly under consideration.

Mr. Webster: Can the hon. Gentleman give the House any information about reports of gunfire between the Indonesian Navy and shore batteries over the weekend?

Mr. Padley: I think the hon. Gentleman had better put a Question on the Order Paper if he wants an answer to that.

Oral Answers to Questions — UNITED NATIONS PEACE-KEEPING COMMITTEE

Mr. A. Henderson: asked the Secretary of State for Foreign Affairs whether he will make a statement on the progress made by the United Nations Special Committee on Peace-keeping Operations.

Mr. Ennals: asked the Secretary of State for Foreign Affairs what proposals Her Majesty's Government have submitted to the United Nations Special Committee on Peace-keeping Operations.

Mr. M. Stewart: The United Nations Peace-keeping Committee adjourned on 15th June after agreeing on an interim report to the General Assembly. It can be reconvened at any time to continue its work. We are in broad agreement with its conclusions so far as they go.
We have played an active part in all discussions on peace-keeping that have been taking place in New York and have

stressed the following points: Primary responsibility for the maintenance of international peace and security rests with the Security Council. However, the General Assembly also has power in this respect and the two bodies should be considered complementary and not competitive.
It falls to the General Assembly to make financial assessments for the cost of peace-keeping operations in accordance with Article 17 of the Charter. The General Assembly may, however, select from a range of alternative methods of financing, which is appropriate to a particular operation.
We believe that the Secretary-General of the United Nations should have at his disposal adequate staff for carrying out peace-keeping operations.
We attach great importance to evolving procedures for peacekeeping by consent. This is the sort of operation which has in fact been undertaken by the United Nations, not to coerce any state but to assist in preserving peace and stability while a political settlement is being found.

Mr. Henderson: While welcoming my right hon. Friend's statement, may I ask whether he would not agree that the discussions in the Special Committee have been bedevilled by the dispute over past liabilities, especially as regards the Soviet Union and France, as distinct from dealing with the problem of future disputes? Would not my right hon. Friend propose that the two should be separated so that the question of getting the United Nations out of the red should be treated as distinct from getting agreements on future organisation for peace-keeping?

Mr. Stewart: Yes, Sir. I think that I would agree with my right hon. Friend on those points, and in this connection I would ask him to await a statement which I am to make at the end of Questions.

Mr. Ennals: Is my right hon. Friend aware of how much we on this side of the House, and I hope on the other side, appreciate the constructive rôle played by the Government in this Special Committee, and also the initiative shown by my right hon. Friend earlier in offering a British contribution? Can my right hon. Friend say whether reports are correct that Britain has offered to make a


voluntary contribution toward helping to solve the financial problems which lie behind this problem?

Mr. Stewart: I am obliged to my hon. Friend. As to the latter part of his supplementary question I would ask him to await my statement at the end of Questions.

Mr. Peter Thomas: Is the Foreign Secretary aware that reports have been received that the President of the Special Committee, Mr. Quayson-Sackey, has said that the Committee would reconvene in August? Is this so? If it is, would the right hon. Gentleman say that he hopes that the Committee will be able to reach a conclusion before the General Assembly meets at some time in the autumn?

Mr. Stewart: I am not sure about its meeting in August, but I have every hope that the General Assembly will be able to resume its work in September.

Mr. Longden: Can the right hon. Gentleman say what effect the report of the Special Committee, which seems very useful as far as it goes, will have in future on special agreements for peacekeeping provided for in Article 43 of the Charter?

Mr. Stewart: I do not know that it particularly affects them. We want to see the machinery of agreements under Article 43 continued, but that I think is a parallel development.

Oral Answers to Questions — ATLANTIC NUCLEAR FORCE

Mr. Marten: asked the Secretary of State for Foreign Affairs what representations he has had from the Union of Soviet Socialist Republics about Her Majesty's Government's proposal for an Atlantic Nuclear Force.

Mr. M. Stewart: The Soviet Government have made their views known to us on a number of occasions, and most recently during my talks with M. Gromyko in March.

Mr. Marten: Can the right hon. Gentleman say whether it was made clear that the A.N.F. will lead to a greater proliferation of nuclear weapons? Does he believe that the A.N.F. proposals will improve East-West relations? What has happened to the A.N.F.?

Mr. Stewart: The A.N.F. proposals are still being examined by our allies. The Russian Government have expressed objection to it. I have never held that that objection is well-founded. If the countries of the Warsaw Pact made comparable arrangements we should not regard it as endangering our security or damaging international relations.

Mr. Paget: The A.N.F. having been introduced with the primary function of sinking the M.L.F., cannot it now sink, too?

Mr. Stewart: My hon. and learned Friend expressed that view before. I disagree with him now, as I disagreed with him then.

Oral Answers to Questions — MIDDLE EAST (MINISTERIAL VISITS)

Mr. Jackson: asked the Secretary of State for Foreign Affairs when he plans to make a visit to the Middle East.

Mr. Fisher: asked the Secretary of State for Foreign Affairs whether, in view of the recent statement by Her Majesty's Ambassador to the United Arab Republic that an official Ministerial visit to Cairo is under consideration, he will make a statement on Her Majesty's Government's plans for such a visit.

Mr. George Thomson: We have the possibility of further Ministerial visits to the area, including Cairo, very much in mind. But the timing must be right and we are still considering the matter.

Mr. Jackson: I thank my hon. Friend for that reply. Bearing in mind that today is a day on which a United Arab Republic Parliamentary delegation is arriving in this country, which I think regardless of politics the whole House will welcome, is not this a good time to plan for a visit to Cairo later on when at any rate differences of views between Britain and Egypt over the Yemen could be discussed and certainly practical measures for an increase of trade?

Mr. Thomson: On behalf of Her Majesty's Government, I should like to welcome the important delegation of Parliamentarians from the United Arab Republic to which my hon. Friend referred. The timing of a possible Ministerial visit to the United Arab Republic is something


which needs careful consideration, because it is important that if it takes place it should register a positive achievement.

Mr. Fisher: In view of the terrorist activities inspired from Cairo which have resulted in the killing of British Service personnel and Arab civilians, is this a good time to make a Ministerial goodwill visit to Cairo? Can the hon. Gentleman also tell me why the director of Cairo Radio, which has been responsible for the most anti-British propaganda for years, is now, as I understand from the Press, the honoured guest of Her Majesty's Government in London?

Mr. Thomson: The violence which is occurring in Southern Arabia and is supported by forces in Cairo is certainly one of the difficulties in the way of bringing about the visit to which both these Questions refer, but Her Majesty's Government are anxious to explore by any means they can ways in which these difficulties between our countries can be removed. It is in the light of that, that the timing of this visit has to be carefully considered.

Sir B. Janner: In his negotiations for visits of this kind would my hon. Friend keep in mind the fact that Cairo, with its violent anti-British propaganda and anti-United Nations propaganda, and particularly with regard to Israel, should be given to understand that we will not stand for that kind of propaganda? Will he express to this individual who has come to this country that we highly deprecate the kind of propaganda emanating day by day from his Cairo Radio?

Mr. Thomson: I think that everyone deplores the advocacy of violence which comes from Cairo Radio, just as everyone deplores the degree of support given to terroristic activities in Southern Arabia, but by far the best means of trying to find a way out of this situation is to allow people from the United Arab Republic to come here and talk with people here and find out for themselves how strongly public opinion feels about this matter and how much it is an obstacle to sensible and good relations between the two countries.

Mr. Maudling: Is it really the fact that the director of Cairo Radio is now here, as my hon. Friend said, as honoured

guest of Her Majesty's Government? It seems incredible.

Mr. Thomson: I do not have exact information on all the members of the delegation, but I understand that one of the members is associated with information which comes from Cairo Radio.

Mr. W. T. Williams: Whatever may be the advantages or disadvantages of visiting Cairo, may we press the Minister nevertheless to make a visit to the Middle East as soon as possible because, quite apart from propaganda from Cairo, there is a good deal of unrest and misunderstanding of British policy among countries which have hitherto been a great deal more friendly to us, the Lebanon and Jordan in particular? Does not my hon. Friend feel that a visit by him or one of his colleagues in the Department would be of advantage in making plain to these people what British policy is and Britain's continuing friendliness towards these States?

Mr. Thomson: As I said, we have further Ministerial visits to the Middle East generally very much in mind. I recently visited the Gulf, and I had hoped to visit Beirut on my way back but, unfortunately, Parliamentary business here prevented that visit taking place. My right hon. Friend the Minister of Overseas Development has just returned from a visit to the Lebanon and Jordan, and further visits of this kind will be undertaken as opportunity offers.

Sir G. Nicholson: Does the hon. Gentleman realise that the House has been deeply shocked by what it has been told about this official from Cairo Radio? Are we to understand that the hon. Gentleman himself was not aware of what is happening, and does not he realise that there comes a point beyond which turning the other cheek is just interpreted as weakness?

Mr. Thomson: I was aware of the delegation which was arriving here and of its composition. I stick to my point that the best way to deal with these matters is to try to clear up misunderstandings and to let people know exactly how the British people feel about these matters.

Oral Answers to Questions — QUESTIONS TO MINISTERS

Mr. Warbey: On a point of order, Mr. Speaker. As neither the Prime Minister nor any of the Commonwealth Prime Ministers can expect to be welcomed or even received in the capital of the Democratic Republic of Vietnam so long as we do not recognise the Government of that country, will my right hon. Friend as a matter of urgency answer my Question No. 41 on the Order Paper.

Mr. Speaker: No point of order arises. We must maintain the rules.

UNITED NATIONS (FINANCES AND PEACE-KEEPING ARRANGEMENTS)

The Secretary of State for Foreign Affairs (Mr. Michael Stewart): With your permission, Mr. Speaker, and that of the House, I wish to make a statement on the present situation concerning United Nations finances and peace-keeping arrangements.
A United Nations Peace-keeping Committee was set up in February this year to review the whole question of peace-keeping operations and the present financial difficulties of the United Nations. As the House is aware, we played an active part in setting up this Committee and in its subsequent work.
So far, however, no arrangement has been reached on the settlement of the constitutional or the financial problems of the organisation. It is clear that the financial problem can only be solved eventually by voluntary contributions from member States.
In these circumstances, we have decided that it is essential to make a voluntary, unconditional, financial pledge to the United Nations. My noble Friend Lord Caradon has, therefore, informed the Secretary-General today that we pledge a sum equivalent to 10 million dollars. This decision arose from discussion with a number of other countries and, in the course of today, several other delegations will make similar voluntary unconditional pledges to the Secretary-General.
This contribution is designed to help restore the United States to solvency—

[Laughter.] I ask the House to excuse me; I should have said, "restore the United Nations to solvency"—

Sir G. Nicholson: What about the United Kingdom?

Mr. Stewart: —and improve the atmosphere for further discussions. In this improved atmosphere, there is a better chance for some compromise on the peace-keeping problem to be worked out before the autumn. Our pledge represents, indeed, an act of faith in the United Nations. It is made entirely without prejudice to our position of principle, and we are fully aware that it does not immediately solve the constitutional problem.
There have been gloomy voices recently hinting that the United Nations has been going the way of the League of Nations. I am not on any account going to accept this. It is the policy of this Government to work to strengthen and support the organisation, and one of the practical ways in which we have demonstrated this earlier was our offer of logistic support for peace-keeping operations for up to six battalions last February.
We shall continue to do all in our power to ensure that the United Nations, far from being allowed to wither and die, emerges strengthened from its present difficulties and better equipped to serve the cause of international peace.

Mr. Peter Thomas: I thank the Foreign Secretary for his statement. I am sure that the whole House will welcome it, in particular the last part, and will appreciate the necessity for making this voluntary contribution.
Can the right hon. Gentleman say how many other nations have pledged themselves to make a contribution, and, if so, is he in a position to say which they are and how much they will be contributing? Can he say, for instance, whether the U.S.S.R. has agreed to make a contribution?
It appears that the Peace-keeping Committee, which has worked very hard, is far from reaching a solution. Unless a solution is found, is there not a danger that the General Assembly will either not meet or not be able to function properly next August? On 23rd February, I think, the right hon. Gentleman told us that he


had some new ideas which he or Her Majesty's Government had in mind to put to the Committee, in consultation with experts at the United Nations. Have these new ideas been put forward, and, if so, is the right hon. Gentleman in a position to tell us something about them?

Mr. Stewart: Other nations will be associated with us, but I did not wish to give the House what might prove to be an incomplete list. Therefore, I would rather not answer the right hon. Gentleman's first question at present. The House will find that other nations are associated with us. I have no information that the Soviet Union is at present making a voluntary contribution.
As regards the longer-term problem of the mechanism for peace-keeping itself, the right hon. Gentleman will remember that I answered an earlier Question setting out the ideas which we had put before the Peace-keeping Committee. It is my hope and belief that the General Assembly will be able to resume its work. I do not want to disguise from the House that we should like to see the United Nations take a real step forward in its history on this question of how peace-keeping operations, when necessary, can be carried on. It does not look as though we shall be able at present to get as far as we could wish in that direction. But we shall at any rate, I think, be able to resume the Assembly's work.

Mr. A. Henderson: I warmly welcome the generous lead which my right hon. Friend has announced, but will he not agree that this approach by the method of voluntary contribution with the object of wiping off the £70 million deficit of the United Nations is far more likely to be effective than seeking to use, or having to use, the provisions of Article 19 of the Charter?
In view of this, will my right hon. Friend say whether diplomatic discussions will continue with the Governments of both the U.S.S.R. and France with a view to persuading them to join in this voluntary effort to wipe off the United Nations deficit?

Mr. Stewart: We thought about it on the basis of a certain number of Governments making this initiative in the hope that it would be followed particularly

by the States which my right hon. and learned Friend has mentioned. We still adhere to the view that we have held about Article 19, but we felt that it was necessary, quite apart from anything else, to help the United Nations to solvency, and we thought that this method was the right step to that end.

Mr. Grimond: Is the Foreign Secretary aware that any steps which will strengthen the United Nations are to be welcomed? Is this contribution for the specific purposes of the Peace-keeping Committee, or is it to help the United Nations generally? When he talks about the position of principle, I take it that he has in mind that we should insist that other nations pay their normal contribution. I take it that this contribution is over and above our normal contribution. Can he tell us whether any of the nations which are already in default, apart from making any further contribution, have agreed to pay up what they owe to date?

Mr. Stewart: The answer to the last part of the supplementary question is "No". This contribution is for the general purposes of the United Nations. It is not tied to any particular item of expenditure.
The right hon. Gentleman also asked whether any of the nations in default had agreed to pay up. No, they have not.

Sir Geoffrey de Freitas: Since one of the greatest debtors is France, which happens to be an ally of ours, will not the Government make special representations to that country?

Mr. Stewart: My right hon. Friend will remember that this was the subject of very keen argument which, at one time, looked as if it might endanger the organisation. One has to consider very carefully, therefore, what representations one makes and how one makes them in this field. What we hope is that this act will make it easier for everyone to discuss the problem in a more relaxed atmosphere.

Mr. Maudling: The right hon. Gentleman is reluctant to specify the other countries involved in this initiative, but does he not appreciate that to judge whether this is bold or merely quixotic we must have more information about what other countries are involved?

Mr. Stewart: I hope that it will before long be a matter of public knowledge, but, if necessary, I would make a further statement to the House.

Mr. Mendelson: My right hon. Friend will do doubt be aware that there is widespread support for the action that he has announced on behalf of the Government. Will he also bear in mind that this dispute involving France and the Soviet Union, is also a political dispute and not merely a matter of paying contributions to the United Nations?
Will he, therefore, bear in mind that he has the full support of most of us in the patient efforts that he and the Government have made? Will he refuse to allow himself to be in any way inspired by those, very often not the best friends of United Nations, who are now particularly interested in Article 19, and will he continue his patient work to reach agreement no matter how long it takes?

Mr. Stewart: I should like to repeat that we adhere to our view about Article 19 and the advisory opinion of the International Court on certain payments. I would accept my hon. Friend's point, which I take to be that this is not merely a question of defaulting on payment. There is here a difference of view about the purposes of the United Nations and the legality of certain decisions. We take one view on that, and we adhere to it.
I will certainly follow my hon. Friend's advice about patience. That will certainly be needed. I think I should draw the attention of the House to this, that, unsatisfactory instrument as the United Nations is in many ways in reflecting all the imperfections of the world as a whole, if anything were to happen to cause the organisation to disappear and be replaced by possibly two or more groupings of like-minded nations on an ideological basis, that would be an extremely dangerous development for the world and one that we must seek at all costs to avoid.

Several Hon. Members: Several Hon. Members rose—

Mr. Speaker: We cannot debate this now without a Question before the House.

OVERSEAS DEVELOPMENT (INTEREST-FREE LOANS)

The Minister of Overseas Development (Mrs. Barbara Castle): Her Majesty's Government have had under consideration for some time the terms on which aid is provided in the form of loans to the developing countries. The importance of the general question of the terms of aid was emphasised at the United Nations Conference on Trade and Development in Geneva last year, and one of the recommendations agreed without dissent was that in establishing repayment terms and interest rates, the overall repayment capacity of the borrowing country should be taken into account.
Her Majesty's Government have had the opportunity, since the conference, of discussing the problem with fellow members of the Development Assistance Committee of the Organisation for Economic Co-operation and Development.
The terms of aid provided by the United Kingdom have been progressively softened over the last few years. A substantial amount has always been provided in the form of grants. Since 1958 the maturity period of development loans has lengthened from a norm of 15 years to between 20 and 25 years. Grace periods on the repayment of capital during periods extending up to the first seven years of the life of the loan have been granted on a widening scale.
In 1963, we announced our readiness to grant waivers for periods of up to seven years of the interest payable during the early years of loans by countries whose position justified such a concession. This has had the effect, in some cases, of reducing the effective rate of interest payable over the life of the loan by nearly half, compared with the normal rate, which is based on that at which Her Majesty's Government can themselves borrow, plus a small management charge.
Her Majesty's Government recognise, however, that the value of the waiver is in some respect limited and that some more flexible means are needed of giving relief in certain cases. They have decided, therefore, to make loans free of interest to certain developing countries. This concession, combined with appropriate arrangements for the repayment


of capital, will give us greater freedom in the determination of terms, and, in particular, will enable us to lighten the burden of debt service in the middle and later years of the loan.
The concession will be applied in selected cases, and with due regard to the economic position of the country concerned and to its capacity to achieve balanced and effective development. It will be understood that we naturally cannot afford to extend these very liberal terms to all developing countries. Since interest-free loans will take the place of loans which would otherwise be made under the waiver arrangements, there will not, of course, be any additional burden on Britain's balance of payments during the first few years of the loans.
When circumstances warrant it, countries which do not receive interest-free loans may receive waivers of interest for the initial years of the loan. We have decided to make a similar concession in appropriate cases to the Commonwealth Development Corporation. To help the Corporation to undertake a greater variety of projects, the Government has decided to waive the interest on selected projects during the period when the investment is fructifying, instead of merely postponing the interest as at present.
This concession will apply to certain agricultural and local development projects, both in cases in which the Corporation invests in the equity and in cases in which it makes loans.

Mr. Maudling: The right hon. Lady is, of course, right in pointing out that the terms of aid given by this country have been eased progressively in recent years, a fact for which this country has probably not been given anything like enough credit overseas. I should like to put three questions to her.
First, is she convinced that it is wise to go all the way to making the loans completely free of interest in view particularly of the importance of ensuring the proper and efficient spending of the money borrowed. Secondly, has any other country gone as far as completely interest-free loans? Thirdly, can she tell us a little more about the method of choosing between those countries which do and those countries which do not receive the concession, because my experi-

ence is that once one gives this type of concession to one country, it is very hard to refuse it to others?

Mrs. Castle: I could not accept the last statement by the right hon. Gentleman, for the simple reason that we already discriminate between countries in giving waivers of interest. This is merely deciding to adopt an even more realistic approach to the needs of certain countries. The basis on which we shall decide whether a country qualifies for an interest-free loan will be the degree of need of the recipient country reckoned largely on the basis of income per head and the prospective burden of debt. In addition, we shall take into account the capacity of the country to achieve an effective and balanced development.
I cannot agree with the right hon. Gentleman that this will prevent us from securing effective management of our aid. We have no reason to believe that it will be more difficult to do this in the case of an interest-free loan than in the case where a waiver of interest is given during a certain period.
The only organisation currently giving interest-free loans is the International Development Association, which charges merely a small management charge of ¾ per cent. Canada has recently followed the Association's example. Of course, at one time the United States gave a lead in this respect, but had to withdraw because other countries did not follow suit. I am sure that all these countries and organisations will warmly welcome our move.

Mr. P. Noel-Baker: Is it not the case that the economic and social progress of developing countries is a major interest of our own country and, indeed, of all the other advanced nations of the world? Have not Her Majesty's Government done rightly in following the example set by the International Bank, which has found it wise to do this?

Mrs. Castle: I entirely agree with my right hon. Friend. The realities of the situation are that while we may seek to impose interest burdens on these countries, their economic situation means that they simply connot carry them. This has meant in many cases merely postponing events through refinancing operations,


thus neither giving them interest-free loans nor getting our money back.

Mr. Frederic Harris: To what extent will the Government give interest-free loans for the remainder of this financial year? Can she name any of the countries which will soon enjoy this facility?

Mrs. Castle: I would not like to specify any particular country at this stage. It will be a matter for negotiation on the basis of the criteria I have mentioned. The application of the principle will start as from now.

Mr. Snow: Has it been considered necessary or relevant in this case to consult the International Monetary Fund?

Mrs. Castle: We have consulted the other donor countries, some of whom are also our creditors, about this move and it has been welcomed. Above all, it has been welcomed by the World Bank.

Mr. Geoffrey Lloyd: While I approve of the right hon Lady's efforts in this direction, particularly the help to the Commonwealth Development Corporation, may I ask her whether she also proposes to help the Commonwealth Development Finance Corporation, an important organisation which, like the C.D.C., will suffer from the Finance Bill?

Mrs. Castle: I have no statement to make on that at this stage.

Mr. Dalyell: What steps are the Government taking to initiate talks with other advanced countries which may similarly give interest-free loans?

Mrs. Castle: We have already had such talks and there is, I believe, no doubt that, when the Development Assistance Committee of the O.E.C.D. meets at Ministerial level next month, this whole question of the terms of aid will be one of the major items discussed and I hope that the step we have taken may encourage other countries to do the same.

Mr. Thorpe: Is the right hon. Lady aware that this will be welcomed by all who believe that economic progress depends on low interest rates? Since this concession will be of restricted application, will preference be given to Commonwealth countries which seek loans for development? Secondly, do her

remarks about the Commonwealth Development Corporation mean, in effect, that it will be able to get interest-free capital for selected projects?

Mrs. Castle: I hope that this move will be welcomed by all who have a realistic approach to the needs of development. It will not be limited to Commonwealth countries. It will be available to all developing countries on the basis of the criteria I have just laid down. That will be the basis of qualification. It is not a question of giving preference to the Commonwealth as against non-Commonwealth countries, but of preference to the poorer; the needier nations as against those who can service a more commercial type of debt.
The proposal is not to give the Commonwealth Development Corporation interest-free loans, but merely to ensure that, at the end of the waiver period of interest which is currently allowed during the fructifying period, the borrowing country will have no retrospective interest to pay. At present, interest accumulates during the fructifying period at a compound rate and this falls as a heavy burden in about the eighth year.

Several Hon. Members: Several Hon. Members rose—

Mr. Speaker: Order. This is a very wide subject, but we cannot debate it now.

Sir C. Taylor: On a point of order, Mr. Speaker. Are not we to be allowed to debate this statement properly at a later date? Are we to be given time to debate if if we cannot ask supplementary questions now?

Mr. Speaker: Order. I cannot answer the hon. Gentleman's question. I have to exercise a difficult judgment about when we stop these questions on statements.

COMPLAINT OF PRIVILEGE

Mr. Raymond Fletcher: May I draw your attention, Mr. Speaker, to a Press report which, in my submission, raises a matter of privilege? It appeared in the Sun on Saturday, 19th June, 1965. It is headed:
No night sittings for me—M.P.


I wish to draw your attention to the relative passage of the report. It read:
A Labour M.P. who was ordered by doctors to rest after Wednesday night's marathon House of Commons sitting said yesterday:
'These all-night debates are a completely needless bore. I do not intend to take part in any more of them.' The M.R, 43-year-old Mr. Raymond Fletcher, was taken ill during the 21 hr. 38 min. sitting that ended at noon on Thursday. Doctors later told him that he must rest for an indefinite period.
Certainly not in the House.
Mr. Fletcher, M.P. for Ilkeston, Derbyshire said: 'In future I shall only go to the Commons during the day. All-night sittings will be out of the question'.
That statement, Mr. Speaker, is totally untrue. I know the origin of it. It appeared in several other newspapers as well. It appeared in the Daily Express, The Times and the Daily Mail. The origin of this misreport is a telephone conversation I had with a Derbyshire news agency known as "Raymond's". What appears in the Sun and what I have just read out is totally untrue. I said nothing of the kind.
I am in no position, unfortunately, to do anything of the kind. The question of privilege arises, in my submission, because any hon. Member who makes a statement of that kind is guilty of arrogant conduct and is treating this House with contempt, and if one treats this House with contempt one arouses the contempt of the House against oneself.
It is on that ground that I submit that this report constitutes a prima facie case of breach of privilege.
I do not complain about the inaccuracy of the report. I am an old Press man myself and I know quite well that one can no more expect total accuracy in the newspapers than one can expect total veracity in the law courts. On many occasions, I have been the subject of inaccurate reports, but I have not worried about them as long as my name has been spelt correctly.
That, I gather, is the normal procedure. But the case I am raising now, because of my reasons for raising it, in my submission, constitutes a prima facie case of breach of privilege.

Mr. Speaker: Would the hon. Gentleman be good enough to bring the newspaper to me?

Copy of newspaper handed in.

Mr. Speaker: I will give consideration to the hon. Gentleman's complaint in the light of the authorities and will rule upon it tomorrow.

SEVEN HUNDREDTH ANNIVERSARY OF PARLIAMENT

The Lord President of the Council (Mr. Herbert Bowden): I have to inform the House that Her Majesty the Queen has appointed 12 noon on Tuesday, 22nd June, in Westminster Hall, to be the time and place at which Her Majesty will be attended by this House to receive their address on the occasion of commemoration of Simon de Montfort's Parliament of 1265 and has given permission for the Commons to be accompanied by representatives of overseas Parliaments of the Commonwealth.

Orders of the Day — FINANCE (No. 2) BILL

Considered in Committee [Progress, 16th June].

[Dr. HORACE KING in the Chair]

Clause 72.—(SHORTFALL IN DISTRIBU- TIONS OF CLOSE COMPANY (INCOME TAX AT STANDARD RATE)).

4.1 p.m.

The Chairman: Before I call the next Amendment, I have two announcements to make. In addition to the list which I have had published in the "No" Lobby and in the Ways and Means corridor, I have, as the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) will be pleased to note, reconsidered and selected his Amendment No. 779.
The right hon. Member for Bexley (Mr. Heath) and his right hon. Friend made representations to me about Amendment No. 785. I am now proposing to take that with the Government Amendments No. 754 and No. 417. We are now coming to Amendment No. 745, with which it is proposed that we should take Amendment No. 464 and Amendment No. 77. Amendment No. 464 is in page 92, line 36, to leave out "shall" and to insert "may", and Amendment No. 77 is in page 93, line 5, to leave out from "say" to the end of Clause and to add:
a reasonable proportion of its profits, as determined by the following subsections of this section.
(3) In determining under the last preceding section whether any company has or has not made such a distribution of its actual income as is therein mentioned, the Commissioners shall have regard not only to the current requirements of the company's business but also to such other requirements as may be necessary or advisable for the maintenance and development of that business.
(4) For the purposes of the said last preceding section, any such sum as is hereinafter described shall be regarded as income available for distribution among the members of the company and not as having been applied or being applicable to the current requirements of the company's business or to such other requirements as may be necessary or advisable for the maintenance and development of that business, that is to say—

(a) any sum expended or applied, or intended to be expended or applied, out of the income of the company, otherwise than

in pursuance of an obligation entered into by the company before the fourth day of August, nineteen hundred and fourteen—

in or towards payment for the business, undertaking or property which the company was formed to acquire or which was the first business, undertaking or property of a substantial character in fact acquired by the company; or
(ii) in redemption or repayment of any share or loan capital or debt (including any premium on such share or loan capital or debt) issued or incurred in or towards payment for any such business, undertaking or property, or issued or incurred for the purpose of raising money applied or to be applied in or towards payment therefor; or
(iii) in meeting any obligations of the company in respect of the acquisition of any such business, undertaking or property; or
(iv) in redemption or repayment of any share or loan capital or debt (including any premium on such share or loan capital or debt) issued or incurred otherwise than for adequate consideration; and

(b) any sum expended or applied, or intended to be expended or applied, in pursuance or in consequence of any fictitious or artificial transaction:

Provided that this subsection shall not operate so as to make the said last preceding section apply as respects any company unless it appears to the Commissioners, not only that income of the company has been or is to be expended or applied for one or more of the purposes mentioned in this subsection, but also that the company has not in fact distributed a reasonable part of its actual income in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of surtax.
(5) For the purposes of subsection (4) of this section, share or loan capital or debt shall be deemed to be issued or incurred otherwise than for adequate consideration if—

(a) it is issued or incurred for consideration the value of which to the company is substantially less than the amount of the capital or debt (including any premium thereon); or
(b) it is issued or incurred in or towards, or for the purpose of raising money applied or to be applied in or towards, the redemption or repayment of any share or loan capital or debt which itself was issued or incurred for such consideration as is mentioned in paragraph (a) of this subsection or which represents, directly or indirectly, any share or loan capital or debt which itself was issued or incurred for such consideration,

and references in this subsection and the last preceding subsection to money applied or to be applied for any purpose shall be deemed to include references to money applied or to be applied in or towards the replacement of that money".

Mr. Patrick Jenkin: I beg to move Amendment No. 745, in page 92, line 35, to leave out "If" and to insert:
With a view to preventing the avoidance of the payment of income tax through the withholding from distribution of income of a company which would otherwise be distributed, where it appears to the Commissioners of Inland Revenue that".
May I begin by expressing my gratitude for the latitude, Dr. King, with which you have agreed to the selection of Amendments, particularly—

The Chairman: In case I forget, I should say that we are not selecting the hon. Gentleman's similar Amendment No. 784, in Schedule 17, page 211, line 7, at the end to insert:
7. A company may in respect of any financial year during the whole of which it is a close company elect by notice in writing to the inspector within twelve months of the end of such financial year that it shall be assessed to income tax as though it were a partnership consisting of its participators and directors and that it shall be exempt from corporation tax for that financial year and in such circumstances the company's income shall be deemed to accrue to its participators and directors as partners in such shares as may be just having due regard to their rights to participate in the income of the company or to remuneration from the company.

Mr. Jenkin: That was the second barrel of my gun. I should be very happy to fire the first at hon. Members opposite.
We start the proceedings of the thirteenth day of the Committee stage of this Finance Bill and I am bound to say that as we plough our way forward the matters with which we are concerned seem to become more and more complex. We have a long way to go, but I hope that on the subject of close companies we shall be able to make fairly swift progress today.
With my Amendment we come to the heart of this part of the Bill, which deals with close companies. Clause 72 contains the sting which imposes Income Tax where a company does not make a reasonable distribution. The Clause imports the concept of shortfall, and this is the word which appears throughout.
The pattern is broadly that of the Surtax legislation originally in Section 22 of the Finance Act, 1931, and re-enacted in Section 245 of the Income Tax Act, 1952, but it has to be recognised—and

I am sure that the Committee is well aware of this—that although the general pattern of those Sections has been followed, there are now a number of significant differences, and it is to some of those differences that the Amendment is directed.
First, in the Clause the direction is mandatory. There are cases where a direction of less than the norm of 60 per cent. is regarded as permissible. The Amendment No. 464 is to substitute the word "may" for the word "shall" in subsection (1) so as to indicate and make it clear that the Revenue does not have to make a direction if it does not consider that appropriate. That is the first difference. Under the old Income Tax Act, with Section 245 companies this was always regarded as being discretionary.
Secondly, for the first time there is now provided what one might call a standard, so that unless a company can show to the contrary—and we are dealing with trading companies—it will have to distribute at least 60 per cent. of its net profits after payment of Corporation Tax. This, as it were, sets a maximum, but in certain respects it could also be said to establish something in the way of a norm and it is the fear of a number of us on this side of the Committee that what is intended to be a maximum will turn into the starting point, or the norm, where assessments are being made.
The third difference—and I appreciate that the Amendment of the Chancellor of the Exchequer may have gone some way to relieving our worries on this score—is that the burden of proof has been shifted to some extent. Under the old Section 245, the burden of proof was squarely on the Commissioners to establish that the company had not made a reasonable distribution of its income. As the Bill is now drafted, the burden is clearly shifted to the taxpayer to establish that he has made a reasonable distribution. The Chancellor's Amendment may have gone some way to move half way back, but not the whole way. Our Amendment makes some difference.
The fourth distinction between the old Sections and the Bill is that under the old Sections administration was entirely in the hands of the special commissioners, I mean the assessing special commissioners, who have their headquarters at Thames Ditton, which were described not


unfairly, and may still be described, as not unlike a concentration camp or prison hutments, whereas under the Bill administration is to be in the hands of local inspectors.
There are thus these four differences, that it is mandatory, that there is the 60 per cent. norm, that the burden of proof is largely on the taxpayer, and that the administration is not now centralised but in the hands of local inspectors.
All the time the Chief Secretary has been trying to persuade the Committee and the country that these provisions in some way represent a concession to close companies. He says that the difference is that the norm of 60 per cent. has to be compared with a maximum possible distribution of 100 per cent. under the old provisions. But that is misleading and does not represent the facts of the case. In the small hours of Thursday morning I wrote something a good deal more pungent when I came to that comment, but, in the hope of keeping proceedings this afternoon sweet, I have moderated my language.
When a Surtax direction was made, a company paid Income Tax and Surtax, the Profits Tax liability being removed. A company did not pay Income Tax, Surtax and Profits Tax, so that in a sense Surtax and Profits Tax were alternatives. Under the new provisions, a company starts by automatically paying Corporation Tax and is then obliged, if a direction is made, to pay Income Tax on the distribution, and the Surtax, and one has to bear in mind that there is also a potential liability to Capital Gains Tax on retentions.

Mr. Harold Lever: But is not the fair comparison what actually happens under a direction under this provision and a direction under the old Section? Was not the direction under the old provision more onerous in toto than any direction which could be made under this?

Mr. Jenkin: The hon. Gentleman is, for the first time in the history of this Committee, supporting his right hon. Friends. With respect, this is the point. One might perhaps put down a Question to find out just how many trading companies ever had 100 per cent. Surtax direction imposed. I think very few.

In the vast majority of cases the revenue accepted something substantially less. The sort of standard on which the thing has tended to group over the years has been that the company would be left with a third of its profits as retentions and would be expected to distribute the rest of them on that basis.
There is no doubt about it that if the 60 per cent. norm is applied a company is substantially worse off. One cannot adopt a new system of corporate taxation which is intended for ordinary companies, to penalise distributions and to encourage retentions and, at the same time, in the case of these close companies, impose compulsory distributions and not expect them to be worse off. The two things are wholly inconsistent and that is why the Chief Secretary's constant reiteration that it represents a concession to these companies has been taken with several handfuls of salt by all those concerned with its administration.
It is against this background we come to the Amendment. The fears of my hon. Friends and myself about this new set-up as it applies to close companies are twofold. The first fear is that the inspectors who will have the administrations of these classes for the first time, will tend to regard the 60 per cent. provision as the starting point and they will feel, "Now, at any rate, we will make an assessment of 60 per cent. unless we are satisfied that something less should be allowed."
It will be a sort of guiding light and it will be up to the company to establish less. This must be comparative with provisions that have applied previously where the amount has been at large. In spite of what the Chief Secretary says about the 100 per cent. being notional, the maximum amount of the distribution has been at large and the commissioners have always been prepared, as a first step, to discuss with the companies their business needs and from that to arrive at what a reasonable distribution should be. This is starting at the other end and we are afraid of what the effect that this might have.
The second point arises from the change of administration. There is bound to be a margin of discretion with the Inland Revenue inspectors, whoever they may be, as to how the section is to be administered. Inevitably, they will have


to exercise their own personal judgment on this and this will lead to wide variations in treatment between different tax districts. Hitherto it has all been dealt with by the commissioners. Now it is to be deal with by the inspectors.
I now come to the Amendment on the Notice Paper. We would like to state firmly, since it does not appear in the new legislation and did in the old Section 245, that the whole of these Sections, from Clause 69 to 74, are all anti-avoidance Sections and have no other purpose. Section 245 of the Income Tax Act started with a provision to this effect and so does our Amendment. It starts off:
With a view to preventing the avoidance of the payment of Income Tax through the withholding from distribution of income of a company which would otherwise be distributed.
It is important to get this on record. We must do so, otherwise the Inland Revenue and the taxpayer at large would lay themselves open to all sorts of activity by those who conduct their operations through these small companies. This would make it quite clear that the Sections should not be used as some sort of fiscal device to squeeze private companies until, as some people say, the pips squeak.
The second point is one of more substance and would require the local inspectors to obtain the sanction of the special commissioners before they put a direction into effect. The Amendment reads:
… where it appears to the Commissioners of Inland Revenue that.
We would envisage that the inspector should refer a case where he and the taxpayer have not been able to reach agreement on the proper distribution. The commissioners would have to be satisfied that a prima facie case was made out. If the taxpayer has tried to play canny with the Revenue and has not disclosed all the material facts then it is quite right that the powers should be there and available.
But there may be perfectly genuine cases where the inspector and the taxpayer cannot agree on what is a reasonable distribution and where in the interests of standardisation and further reasons which I have mentioned, it would seem to be desirable that the inspectors should get prior sanction of the commissioners before making a direction.
4.15 p.m.
We have three objectives in mind in suggesting this. First, it limits the possibility of unreasonable assessments, unreasonable distributions being demanded by tax inspectors, particularly in the early years, when they have not had any experience in dealing with these matters and when they may be over-enthusiastic and overworked. In those circumstances, one needs to have some sort of long-stop to make sure it is not always the 60 per cent. provision which is automatically applied, leaving the taxpayer to appeal against it.
The second objective is that this would ensure some measure of standardisation. There is a wide measure of discretion to be exercised in administering these classes and by requiring that the matter should be referred to the special commissioners one could, to some extent, ensure standardisation between the practices in different tax districts.
One could envisage, and I am not being fanciful, that companies would choose to set up their registered offices in tax districts where it was recognised that tax inspectors took a reasonable view of these things and to avoid districts where the inspectors took an unreasonable view.

The Chief Secretary to the Treasury (Mr. John Diamond): I am sure that the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin) will realise that inspectors are continually on the move so as to avoid anything like this happening.

Mr. Jenkin: I recognise that. But they do stay for a number of years in a particular place, perhaps four, five or six years, and in the early years it will be difficult for them to establish any sort of standing practice against which to set their sights.

Mr. Raymond Gower: It might be feasible that a company would follow a good inspector around.

Mr. Jenkin: They would be following a very good precedent. It is well known that firms of moneylenders follow lenient county court judges around the country because they recognise that some county court judges are more tender to moneylenders than others.
This provision of requiring the special commissioners to be satisfied has the effect of shifting, to some extent, the onus on to the Revenue. They must first make up their minds that avoidance is being perpetrated, that there is excessive retention and only if they are so satisfied, and they must be reasonably satisfied, can the commissioners give the inspector the go-ahead. This is a limited but valuable safeguard. It is limited because in the last resort the Revenue must have the right to assess the company and to leave the taxpayer to prove that he has, in fact, made reasonable distributions. This is valuable in that it makes sure that the Revenue has an opportunity to satisfy itself that it is right that the whole provisions of the classes should be put into effect.
Finally, I would remind the Committee that this is an anti-avoidance provision and that, as such, the Revenue must be satisfied avoidance is being perpetrated. The taxpayer has to prove he is making reasonable distributions. This is rather like the criminal in a court of criminal law having to satisfy the jury that he is innocent, that there is otherwise an assumption of guilt. I am certain it would be wrong that we should import anything of that sort up to a certain point in a taxing Statute.
I suggest that for the reasons which I have given this is a reasonable Amendment. It does not detract from the avoidance provisions of the Bill, but it puts some matters right, and I hope that the Government will be able to consider it sympathetically.

Mr. Harold Lever: I observe that when I candidly and objectively find it right and appropriate that I should praise a Government action, this gives rise to howls of indignant rage from some hon. Members opposite, as if they had come to depend upon me as an ally for all kinds of irresponsible criticism. There is nothing in my attitude which justifies this. I have spoken with complete candour when I have been critical of the Government, and I propose to go on doing so.

Sir Tatton Brinton: On a point of order. Could the hon. Gentleman speak with complete clarity? He is very difficult to hear.

Mr. Lever: I am grateful to the hon. Gentleman, because I do not want any of my words to be lost.
I was protesting against the attempt to elevate matters of administrative convenience, good sense and good business sense and reasonable fairness in the administration of tax legislation into political issues or to make them matters of ideology. This is an entirely spurious and bogus point of view.
When my right hon. Friend the Chancellor of the Exchequer listens, as he often has done throughout these lengthy debates, to criticism from the front and, sometimes less conveniently, from the rear, and has, in his open-minded and fair way, come to see that some improvement man be made, I lament very greatly that hon. Members opposite feel that they have lost a political weapon and that they cannot exacerbate further the relationship between the Government and business people who are concerned with this legislation and vent their indignation on my right hon. Friend by personal insult and abuse.

Hon. Members: Oh.

Mr. Lever: I have attended these debates, and every time that my right hon. Friend weighs up a matter carefully, and then makes a concession which he thinks will be an emollient and will help the legislation to be acceptable to the Committee and to the taxpayer, the invariable result is that the right hon. Member for Bexley (Mr. Heath), or one of his team or relay of the Conservative Party doing duty at that point, tells the Chancellor that he must have been utterly incompetent for putting the provision in question in its original form in the first place. As I have pointed out before, he is caught on the fork of the right hon. Member for Bexley.
I welcome the steps taken about this Clause, to which my attitude broadly is this. It should have been even more improved than it has been, but, in view of the Amendments which have been made by the Chancellor of the Exchequer, it is probably, on balance, less harsh to business people than the existing legislation which has been operated so long without complaint or without excessive complaint by the business community and


certainly without any attempt having been made to amend it during the 13 years of office of the Conservative Party.
The old position was this. Under Section 245, if the commissioners thought that a dividend should have been paid greater than that which had been paid, they made a direction, and if the taxpayer thought it right that he should have an impartial decision of the special commissioners on this point and exercised his right under the Statute to appeal and lost, every penny of the company's income was deemed to be Surtaxable income in the hands of its members. This was particularly objectionable as many a citizen would compromise his claim inevitably because it was too much of a gamble to go before the special commissioners and have his rights judicially established.
I assert that when a citizen has a right he should never be penalised by having it judicially established by the machinery of the Statute. Here no such penalty is exacted on the citizen and I am happy to welcome the removal by the Chancellor of the Exchequer of a gross injustice which must have affected many business people for many years, namely, that they were told, and constantly had to be told by their advisers, that they could fight the issue but that if they did not settle with the Inland Revenue and lost, 100 per cent. of the profits would be deemed to be the income of the shareholders and, hence, Surtaxable.

Sir T. Brinton: I am sure that the hon. Gentleman is wrong on this point, which has come up before. The liability to be assessed on 100 per cent. of one's profits was the case until the Chancellor of the Exchequer, I think in 1961, took away the Surtax umbrella, and from then on one was assessable only on what the Revenue maintained one should have paid. Is not that the case?

Mr. Lever: The hon. Gentleman said that he was sure that I am wrong. There is nothing more distasteful to me than to remove any certitude about anything, but in this case, reluctant as I am to disturb the complacent situation in which the hon. Gentleman has been all these years, I can do it with less reluctance because the evil situation is to be remedied

by the Government, since in this Clause that can no longer happen.
The hon. Gentleman will find that this is so. It is not a matter of dispute or of opinion. Until now, if a citizen was served with a direction under Section 245, and if he appealed to the commissioners and lost, the whole of the income was deemed to be the income of the shareholders for Surtax purposes. This is a very unfair rule because directors of companies might say, "We cannot pay a dividend this year", and the special commissioners might say, "You could have paid 10 per cent. this year".
They are deemed to have paid a 100 per cent. dividend because the commissioners said that 10 per cent. was appropriate. Equally, up to now, if a company paid 40 per cent. and the special commissioners thought that they should have paid 60 per cent., the consequence was they paid Surtax, not on 60 per cent. but on 100 per cent.
All that illogicality of an oppressive character is being brought to an end. I a sure that right hon. and hon. Members opposite wish to be fair to the Chancellor of the Exchequer and to the Government in this matter, and I should welcome it if they would at least express some satisfaction that this oppressive illogicality, which, alas, has been in our fiscal system for a long time, is now to be brought to an end. I am very grateful that this is so.
I leave it to my right hon. Friend the Chief Secretary to do the arithmetic, because that is not my strongest point, but I think that the Committee will find that something approaching a quarter of the gross income of a company can always be retained after tax and added to the company's capital, no matter what direction is made on the company or how severe the consequences. About 24 per cent. of the company's income net will remain in the company. That was not so before.

Mr. Patrick Jenkin: Mr. Patrick Jenkin rose—

Mr. Lever: If the hon. Gentleman wants to commit himself, let him do so.

Mr. Jenkin: Would not the hon. Gentleman agree that under Section 245 the normal practice was that companies were allowed to retain on average about 33⅓ per cent.?

Mr. Lever: I was not talking about the normal practice under Section 245. I was talking about the worst which could happen under the new legislation, which is that something approaching a quarter of the company's profits will be available net of all tax and left in the company to be added to the assets of those who own it. Under this "dreadful" legislation, which is so often said to be inspired by malice against the business community and whose intention is to destroy family and private companies, the worst which can happen is that 24 per cent. of the profits, after all tax, can remain in the company and be added to the company's assets. Under the old legislation, nothing of the kind could be guaranteed.
4.30 p.m.
The worst which could happen under the present legislation is a great deal more severe. I do not know the figures. I shall not pledge myself on the arithmetic, but it is considerably less than 24 per cent.—probably only half that figure—which could be left in the worst circumstances under the present legislation. I am dealing with the worst circumstances first. It is interesting, if we are trying to get an insight into the mind of the Government, of the Chancellor and his Ministers and to see whether there is some justice in the complaint that the Government are trying to destroy private companies, to start off by examining the facts.
The first fact which I wish to establish is that every director of a family company or a close company knows today that, in the worst circumstances under the new legislation, he will be able to add probably over twice as much to the company's assets as would be the case in the worst circumstances under the existing law.

Mr. Gower: Will the hon. Member deal with the fears of those who feel that what was done, certainly not as general practice, but rather in exceptional cases, will now tend to be the general practice?

Mr. Lever: I will deal with that.
The next question is: what is likely to happen in the general run of cases? We are assured that, in the general run, no such thing as a 100 per cent. of distribution was the rule. That is absolutely true,

and nobody would challenge it, but why should anybody suppose that 60 per cent. will become the rule now? I will submit that this will not be so, for two reasons.
I will take the first point and go back to the original situation under the present legislation. Under the present legislation, the reason that the rule is not 100 per cent. is that the Commissioners of Inland Revenue thought it reasonable that companies should have money for their business in pursuance of the provisions of the Act. Of course, if a company made a profit and did not pay it all out in dividends, the special commissioners would decide whether this was justified. It was not as an act of philanthropy in the past that they did not declare 100 per cent. available. It was done in conformity with the law and with the 1952 Act.
The present position is that we can call it a concession—the Opposition now call it a concession—that if the special commissioners did not enforce 100 per cent. dividends as the rule—as they could have done in certain circumstances—it was because they were obliged by Statute to have regard to the requirements of the business. They will still be obliged by Statute to have regard to the requirements of the business. It is not the case that, in the past, they were feeling generous to shareholders and will now be told to be ungenerous. They will be in exactly the same position in deciding what might be paid under the new law as they were under the old, except in one respect, that of burden of proof, which I shall come to in a moment.
Leaving aside the question of the burden of proof, the special commissioners who behaved decently and fairly to taxpayers under the existing law will be obliged to behave fairly to taxpayers under the new law in precisely the same manner, with the added advantage for the taxpayer that the special commissioners were compelled in the past by Statute and the illogicality of the Statute to be harsh and oppressive to taxpayers, who brought the matter to trial. When the taxpayer lost, even though the special commissioners thought that a 60 per cent. would suffice, a 100 per cent. dividend was automatically exacted. Under the new law, the special commissioners will be turned away from the worst circumstances to


the average run of case. They will be governed by the same principles as before, but they will not be obliged—as they were before—to inflict penal consequences on the taxpayer who lost his case on appeal.
It seems that there is a greatly exaggerated excitement about this Clause in the mind of the Opposition, and this is genuinely so. I can well understand their concern. It is very appropriate that they should be concerned about it, because we have often talked about double taxation and about the fact that the House of Commons is here as a watchdog. The House has to see that there is no oppression of the citizen. I do not complain—I do not think that the Government should complain—when the Opposition are vigorous to see that the taxpayer is not oppressed by oppressive legislation.
I am sure that, with these Amendments, it has become clear that this Clause, far from arousing the taxpayer's anxiety, will be a boon to him. This is important, because it is not only the enforcement of the law which matters, but the taxpayer's state of mind. The average businessman wants to get about his business without having to worry his head about whether he will be subject to a penal direction which will cause him anxiety. I hope that it will go out from the Committee—I hope that the Opposition will play their part in insuring that it does—that in many important respects this Clause is an advantage to the businessman, compared with the ones it replaces.
The other points mentioned did not seem very valid. There is no guiding light of 60 per cent.; there is, as I see it, an absolute limit of 60 per cent. I deny that it is a guiding light for inspectors of taxes. The question of standardisation between districts is also a false point, because, of course, one can never standardise any court which has to have many judges. We cannot standardise the behaviour of our High Court judges, nor could we do it with the special commissioners. If special commissioners or inspectors of taxes sit on all these cases, we shall have to recruit a substantial team to do this work.
It is one of the facts of life that if one has 100 judges one will have 100 different directions in the operation of the law. We have to provide a particular guiding principle which seems fair and

reasonable and I think that the Chancellor has done that in this Bill.
The other point—that we need a "long stop" to protect people and that the special commissioners should give the direction and not the inspectors—is a bad point basically by reason of practice. The suggestion is that if we do not have this long stop, inspectors of taxes will pepper the citizen with these directions and they will be left to appeal. If the inspectors are foolish enough to do this, they will bring the whole operation of the Clause to a very convenient standstill. It is not conceivably possible that any tribunal of special commissioners could be set up by the Government which could cope with the appeals. They already have the greatest difficulty in getting these appeals heard in a reasonable time under the present law.
If the inspectors were to pepper the citizen with unfair directions from which there would be hundreds of appeals, the first time the Revenue would collect any taxes in respect of 1966 would be about 1975, because there would be such a queue of cases waiting for trial and confirmation. Head offices would soon see that an inspector was issuing too many directions in relation to his area or to the kind of profits which were coming in and he would have a polite note. I know nothing of the procedure—

Mr. Anthony Barber: Would the hon. Member say what it is that he finds objectionable about the Amendment?

Mr. Lever: I do not find the Amendment objectionable. What I object to are the speeches and comments of hon. Members opposite. I would find the Amendments not unreasonable in themselves. They did not enlist my passionate enthusiasm. I hate to admit this in public, though it is well that I do so now, but I cannot swear that I have examined every comma and every phrase in the Amendments. Therefore, I do not want to commit myself in detail on this. I do not find them obnoxious. What I think ought to be said, and has not been said by the Opposition so far—I think that they have a moral duty to say it—are the kind of things which I have been saying in relation to this Clause and not the kind of things which were said so ably by the hon. Member


for Wanstead and Woodford (Mr. Jenkin), in implying that it was oppressive.
I conclude on a slightly cavilling note. My own Amendments are down and I am still hopeful that they will catch the attention of the Chair at some point. This is not altogether to be regarded as a certainty. The net effect of my Amendments—

The Chairman: If the hon. Member's Amendments are selected by the Chair, and he is called, he will be able to talk about them. He should not talk about them now, however.

Mr. Lever: The last thing in my thoughts, Dr. King, was to talk about my Amendments before they are called.
I was about to mention the one point on which I have a degree of sympathy with the Opposition. That is the question of the onus of proof.
I wish that the Government would budge on this matter and give a great deal of satisfaction to many people as well as myself. I am told that the reason for disturbing the existing rule, whereby the onus of proof is on the Revenue and not on the taxpayer, is that it does not make any difference in practice. If it does not make any difference in practice, for goodness' sake leave the rule as it is. It makes a great deal of difference emotionally for the taxpayer to feel that the onus of proof is on the Revenue.
I cannot understand why my right hon. and hon. Friends dig their heels in on this matter. We have worked the system adequately under the old rule with the onus of proof on the Revenue. It ought to be on the Revenue. Practice has shown that to be reasonable and there is no reason why it should not continue that way.
I add just one argument why the onus should be on the Revenue. An onus of proof means, in the end, that if there is any reasonable doubt in the matter the benefit is given to the one who is the beneficiary of the onus of proof. If the onus of proof is upon the taxpayer and there is doubt in the matter, if the special commissioners honourably enforce the legislation, as I think they will—because they are one of the most immaculate and fair-minded tribunals in the land—if the

special commissioners think that possibly the money is required for the purposes of a business but the onus of proof has not been discharged and there is substantial doubt in the matter, it means that the benefit of doubt must be given to the Revenue, the Surtax direction must be made, the Income Tax direction must be made and, as a result, money must be paid out from the company which may—I put it no higher—reasonably be needed by the company but probably is not needed by the company.
If there was doubt whether the company would be prejudiced by the payout or retention of the funds, undoubtedly the benefit of the doubt should be given to the taxpayer, because it would not be a disaster if the Revenue did not get the Income Tax and Surtax but it might be a disaster to the company if the Revenue got it.
Much as I agree with my right hon. and hon. Friends about the beneficial character of the Clause, with that one saving criticism, I beg them to look again at this matter and to place the onus of proof where it always has been without disturbing the financial solvency of the State or turning the world upside down. Why not put the onus where it was before, reassure many taxpayers and business men throughout the country and make the Clause a real advance in our fiscal legislation?

Mr. Geoffrey Lloyd: In supporting the Amendment of my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) I should like, first, to welcome what the hon. Member for Manchester, Cheetham (Mr. Harold Lever) has just said about the onus of proof. This is an important matter. Many hon. Members in the Committee regard it as important and there is no doubt that multitudes of small and medium sized businesses throughout the country regard it as an important point.
In supporting my hon. Friend's Amendment, I should like to bring to the notice of the Chief Secretary an example, which is not a bad one, of the kind of anxieties which seriously afflict a large number of serious business people all over the country. The firm in question is a confirming house which provides credit for firms overseas purchasing goods from the United Kingdom. It has furnished me


with these figures, which I will give as simply as I can. I am sure that the Chief Secretary, with his experience, will seize them quickly.
Over the last 10 years to 1960, the firm's profit was £1,175,000, of which £545,000 was paid in tax—it is a Surtax company—£155,000 was distributed in dividend and £475,000 was retained. The company went on well, but in 1961 it unexpectedly incurred a heavy loss of £351,000 in South Africa.
The managing director is anxious as a result of making the following calculation. Admittedly, he has made his calculation on the basis of a 40 per cent. Corporation Tax. I know that the Chief Secretary has continually insisted on a figure of 35 per cent., but he will understand that because his right hon. Friend the Chancellor mentioned a figure of 40 per cent., everybody in business is calculating on 40 per cent. because that is the only safe conservative thing to do. At least, I make it clear that the figure is based upon 40 per cent. Corporation Tax, plus 60 per cent. compulsory distribution.
4.45 p.m.
Had Corporation Tax been enforced in those years, the company calculates that there would have been a profit of £1,175,000, minus Corporation Tax of £470,000, leaving £705,000, of which 60 per cent. distribution would have meant distributing £423,000, leaving a balance of £282,000. That is £193,000 less than the £475,000 which the company had in hand at the end of 1960 and out of which it was enabled to meet the loss of £351,000. I am sorry to inflict these figures on the right hon. Gentleman, but I am sure that he seizes the point. The main point of it is perfectly clear.
Perhaps I may make the point more simply by quoting the letter from the managing director, who states:
This is a private company which over the years has been successful by virtue of the fact that succeeding generations of management have steadfastly pursued a policy of prudent husbandry—a consistent policy of building up reserves combined with conservative dividend payments. However, five years ago this company took a very serious loss in South Africa which substantially exceeded its capital. Had it not been for the prudent and cautious policy referred to, this company would have been unable successfully to overcome its difficulties and would have been

bankrupted. Had the proposed legislation been in force since 1945, there is no doubt that it would have failed, whereas it not only withstood the heavy blow suffered, but has successfully made a comeback to a sound financial position.
This is the kind of anxiety which many serious people feel.

Mr. Harold Lever: Why should the firm suppose that after this legislation is passed the special commissioners should enforce a greater dividend than they would have accepted prior to this legislation? These retentions were possible only because the special commissioners allowed them. Why should they not allow them after the Clause has been passed into law?

Mr. Lloyd: This is one of the reasons why I raise the point. It may give the Chief Secretary the possibility of making it clear that that is not the intention of the Government under the Clause, although my hon. Friend the Member for Wanstead and Woodford, in moving the Amendment, was quite clear that he had anxieties about the fact that it might become law. This is the point about which we are anxious.
If I may develop one further final point which is strictly related to the matter, I think that the Chief Secretary has waved aside too easily the point about the transference of the administration of these provisions from the special commissioners to the local inspectors. It is not my purpose to say anything against the local inspectors; I well know that they are an extremely efficient and good body of public servants of the best internal revenue service in the world. The point is, however, that the special commissioners, in their special section dealing with these matters, have built up an expertise such that business people have known that when they have consulted them they were consulting people who thoroughly understood the points.
With the best will in the world, I must point out to the Chief Secretary that it is asking a lot of the local inspectors to think that they could possibly become experts in a matter like this, which involves the distribution policy of companies, within a very short space of time. This is wholly alien to any of the work that they have hitherto been asked to do. It is an entirely new departure.
The Chief Secretary is, I am sure, well aware that the distribution policy of a company is one of the central features of the strategy of a company's development. It is an extremely important point. It is something on which business people and boards of directors spend a great deal of time. It is not exactly a matter in which one can always say by rule of thumb exactly what should be done. It is something in which the creative instinct of business men is of great importance. Business men have the feeling that they may have to submit a case to people—local inspectors—who are not at all practised in this kind of thing, whereas they would have confidence in the special commissioners. I hope that the Chief Secretary will be able completely to relieve these anxieties, although he is likely to find it difficult to do so.

Mr. George Y. Mackie: I wish to stress the importance of the case of the very small company just starting up; the man who is transferring his business from being on his own to a limited liability company—not to limit his liability, but to help him to build up his company. It is to people of this sort that we in my constituency and the parts of Scotland with which I am particularly concerned are looking to replace the established industries which are dying. These are the people who can bring new life, industry and energy to these areas.
The hon. Member for Manchester, Cheetham (Mr. Harold Lever) was concerned to defend the Chancellor's good name and to express the Chancellor's concern for the private section of business, particularly the small company. If the hon. Member for Cheetham agrees on the question of the onus of proof, I suggest that he has gone a long way towards agreeing that the Chancellor has begun to damage his name by making it appear to the small company that while the big company can retain all its profits if it wishes to do so after the payment of Corporation Tax, it is mandatory on the small company to prove that it may not distribute up to 60 per cent. of its profits.
I know many companies which are concerned about this matter. I will instance one. It is an engineering company in the north-east of Scotland which

employs 300 people and exports its products throughout the world in competition with the Germans, Americans and others. The company began in a small way, with the directors virtually sleeping beside the machines and working them after the men had gone home. Far from wanting to distribute all their profits, they took very little money themselves; hardly enough to live on.
People of this type are extremely valuable to us. I hope that the Chancellor did not mean what he has been understood to mean in his references to this subject. If he did mean it there would appear to be at least a sign of incompetence on his behalf and an indication that what the right hon. Member for Bexley (Mr. Heath) said was right. The Chancellor must go some way to assist, by means of the taxation system, the energetic and, perhaps, some might say, slightly stupid individuals who do not want to enjoy the fruits of their labours but are more interested in their businesses. If we are to continue to have these people the Chancellor must encourage them to plough money back, borrow more money and go on doing their good work.
I could instance many cases of companies throughout the north of Scotland, the area which I know best, where these energetic activities are taking place—companies which are providing the only sign of real life in the area—where the big, established old industries have grown too fat to develop or have become too lazy and, which, perhaps, need something done in the Surtax direction to slim them down.
The people who matter are the ones who are starting new industries from scratch. If the Chancellor would accept the suggestions, certainly the Amendment dealing with the onus of proof, and say that it is reasonable for such people to plough money back and build up their businesses, he would go a long way to keeping these people energetically in business. After all, the right hon. Gentleman should be only too pleased to tell such people that they can have their money until they are dead or sell out.

Mr. Diamond: It might be convenient to the Committee if I answered the debate thus far. If any hon. Member wishes, at the end of my remarks, to


pursue any matters further, he will be at liberty to do so and I, will attempt later to clear up any further points. I am encouraged by the desire of the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin), from which I do not dissent, that we should make progress consistent with the thorough discussion of important points. This is one such point.
I come immediately to the question asked by the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie) to put the matter in its appropriate philosophical background. The Government are most anxious that the very kind of encouragement to which he referred should apply universally. Everyone should be encouraged to plough back in the real sense of that term—that is, the development of his business by using his realised profits for the purchase of new plant and so on so as to get greater efficiency and more productivity. These are the very things which my right hon. Friend wishes to encourage, and I repeat "universally".
There is no distinction to be drawn, as the hon. Member for Caithness and Sutherland drew, between the big and small company. It is the desire of my right hon. Friend that all companies, big and small, should adopt the practice of ploughing back as much as possible. The hon. Gentleman said there should be a kind of tax system to encourage this, and we are bringing in Corporation Tax to do that very thing. It would be wholly inconsistent with the whole philosophy, background and approach of Corporation Tax if we said, on the one hand, that we want to encourage plough-back and, on the other, that we do not want to leave businessmen with the money they need to buy new plant to expand. I will, therefore, explain why the present situation serves those requirements best and deals fairly with all companies.

Mr. Eric Lubbock: If what the right hon. Gentleman says is true, how did this 60 per cent. compulsory distribution figure get into the Bill in the first place?

Mr. Diamond: The answer is that it does not exist. I hope that the hon. Gentleman will allow me to make my

speech, when I am sure that I will remove any anxieties he may have.
I assure the Committee that all the fears, which have been widely expressed—not only in the Committee, but throughout the country—are based on misapprehension, not only of the intention of the Government, but because of misunderstanding of the enactment proposed. The Amendments which my right hon. Friends are introducing do nothing to alter the law, but make it more clear and comprehensible. However, we are not dealing with those Amendments at present.
Starting on that basis, I will endeavour to explain why it is wholly consistent with our attitude that there should be every possible encouragement to plough back, by which I mean utilising realised profits, cash funds, to purchase new plant, premises and so on and to have such money available for working capital to expand, extend and be more efficient. It would be wholly wrong, however, if such a procedure were to be used by companies which wished merely to avoid taxation. We are at one in wishing to take steps to prevent avoidance. So I repeat that there is a stage between distribution and plough-back. That is retention; idle, passive retention.
A company which has made profits, has realised cash, may do three things with it. First, it may distribute it by way of dividend to its shareholders. Secondly, it may plough it back, buy new plant and machinery and so on. Or, thirdly, it may leave it idle in the bank or invest it in, say, portfolio investments because it has no business use for it. It is that third use which has not come out clearly in previous legislation and which is the new idea we are inserting in this legislation.
It is that which we want to avoid, as well as pure tax avoidance. The legislation therefore moves on the basis that businessmen shall be encouraged to either distribute by way of dividend or, and we hope more so, to plough back—not as the right hon. Member for Bexley (Mr. Heath) said, to grow fat; that is what this legislation is here to avoid. This is the survival of the fittest and not the fattest.

5.0 p.m.

Mr. Gower: The right hon. Gentleman has dealt with the stages of distribution, retention, and what he calls ploughing back, but can he relate his argument to the provision of reserves to meet the sort of situation mentioned by my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd)? That is something that cannot be easily foreseen even by the tax inspectorate.

Mr. Diamond: Yes, I shall come to that. I have made very careful note of what the right hon. Gentleman said, and I will deal with it. In fact, if it is helpful to the Committee I will deal with it at once.

Sir Douglas Glover: I am very grateful to the Chief Secretary for giving way, as he has done, because I have a great deal of sympathy with his argument on this matter. It is in the case of the firm that is getting fat that the onus-of-proof point worries me. A firm may plough back its profits this year, next year, and the year after, but it will take a lot of explaining to the inspector of taxes. It may take the view that in five years' time it will have enough capital to build a factory, but that is something very difficult to explain. Such a company may have Surtax charged before it has the capital it wants.

Mr. Diamond: Both the hon. Member for Barry (Mr. Gower) and the hon. Member for Ormskirk (Sir D. Glover) have expressed the same anxiety about what I have referred to, for the sake of simplicity, as using realised profits in the form of cash to invest. What they both ask is, "What about adding to your reserves against the need for a further cash investment of a large sum in a year's time, or two or three years' time?"
The answer is, of course, that there will be no difficulty in satisfying the inspectors on this point, because we are using exactly the same form of words and exactly the same criteria as have hitherto applied, and which have satisfied the constituent of the right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd). The right hon. Gentleman demonstrated that because this particular company, which needed working capital in the form of cover for its liabilities and guarantees, was able to satisfy the Surtax commissioners—it being

a Surtax company, as he said—it was entitled to withhold profits amounting to about £500,000 out of £1⅛ million over a period of 10 years. It was able to do that for that very reason.
I say to the right hon. Gentleman, and I am sure that he realises it, that the same criteria are being adopted, the same words have been imported into this legislation, and the same judgment will be made. The right hon. Gentleman was trying to compare the result of applying those criteria with the maximum distribution that any individual company could be required to make under the proposed legislation. That does not represent a fair comparison. The fair comparison is practice in the past with practice in the future, and I say that practice in the future must coincide with practice in the past in this respect because the same words are being used and the same criteria are therefore involved.
I am grateful to have the opportunity to repeat that the 60 per cent. is a method of eliminating from discussion a whole host of cases. No longer will it be necessary, as it is today, for a company to satisfy the Revenue that it has made a reasonable distribution if it has distributed 60 per cent. of its net profits, because there is no longer any opportunity of argument. The law will state that a 60 per cent. distribution ends the argument. That is what it is about. I say that it is a relaxation, and it is a relaxation—that is the whole purpose. A vast number of companies that might otherwise have been put to the trouble of, perhaps, no more than writing a letter to the inspector of taxes explaining the position—or having an interview with him—will no longer have that trouble. They will be completely out of the way.
I repeat that the figure is 60 per cent. net; that is to say, with a 40 per cent. Corporation Tax, it means a 36 per cent. distribution only, and with a 35 per cent. Corporation Tax, it means a 39 per cent. distribution only. That is the amount of the distribution that will put an end to all possible argument. One bears in mind the way the thing works. A company makes a profit, it decides on its dividend policy, it sends the balance sheet to the inspector, and, at the moment, a letter goes with it, saying, "The reason why the dividend is only so much is as


follows." That will happen in the future.
It is only when there is disagreement between the Revenue and the taxpayer on whether there has been reasonable distribution that the rest of this provision comes into account. It is only then that consideration has to be given to the 60 per cent. In those circumstances, there is no possibility of the 60 per cent. being regarded as a norm. It is the ceiling. It is the maximum. It is the figure which removes a whole host of cases. I therefore hope that hon. Members will no longer have any anxiety on this score.
I repeat that, (a), it was the intention and the instruction to the Revenue that there should be this kind of relaxation; (b) the words of the Clause carry this out and. (c), the only difficulty arising out of this is the question of the onus of proof, because under the present situation we have a penal sanction. Because it is a penal sanction, the courts have not interpreted these words which the Amendment seeks to introduce as themselves putting the onus of proof on to the Revenue—because it has been held that the words are purely descriptive, and there is a decided case on the point.
It is because of the penalty that the courts have said that, where we have a penal provision of that kind, it is only right that the onus of proof should be put on the Revenue. That, in practice, has been the position. In practice, what has happened is that there has been discussion between the Revenue and the taxpayer. In practice, the same thing will happen.
Some hon. Members have expressed anxiety that it will happen with a gentleman called an inspector instead of with a gentleman called a special commissioner. I doubt very much whether there is anything in that point at all—I really do. If there was, we would be only too happy to deal with it. But it will meet the convenience of the taxpayer if, instead of having to go to some part of London—it is Wimbledon, I think, with regard to this particular section—from all over the provinces and from Scotland—because in this unusual respect Scotland does conform to our fiscal legislation—the taxpayer could call on his local inspector of taxes, who is continually talking to businessmen all day long.
I do not understand the argument that the inspector of taxes is not aware of the needs of business. Talking to businessmen about their problems, seeing their balance sheets, is his daily nourishment. It is that with which he is conversant in particular. He does not see one single aspect of the matter, as may the special commissioners, who are concerned purely with Surtax on companies, but sees the whole field. I should have thought that on every possible ground he would be the right man to go to, bearing in mind that if there can be no final agreement there is the same appeal machinery open on all sides.

Mr. Patrick Jenkin: Before the hon. Gentleman leaves this point, will he not accept that there is some merit in the suggestion that where the taxpayer and the inspector have been unable to agree the inspector should seek the prior sanction of the special commissioners before proceeding further?

Mr. Diamond: When there is a dispute with the inspector of taxes it is open to the taxpayer to appeal to the general commissioners or to the special commissioners. The general commissioners are versed in the activities of the business community, to which the hon. Member has referred. These are the people whose criterion he said is the right criterion. They are the people who should know about these matters. It would be most unfortunate to deny to the taxpayer the right to air his case before that kind of body.

Mr. Jenkin: Speaking from memory, is it not right that under Section 245 the appeal lay only to the special commissioners? Secondly, is there any distinction to be made between the assessing special commissioners—the Wimbledon people—and the general commissioners?

Mr. Diamond: The point I am making is that we are not denying any rights of appeal to anyone, but are adding to them by allowing the taxpayer to appeal to the general commissioners if he desires. That is the very body described by the hon. Member when speaking on his Amendment, to which at the moment that kind of opportunity does not lie. We are giving the taxpayer a convenient opportunity which does not exist at the moment.

Mr. Harold Lever: There are two sets of people called "special commissioners", but they are two entirely different bodies. I am not sure that my hon. Friend has persuaded me and I have an open mind on this matter. What he is saying is that without prejudice to the right of the taxpayer to appeal either to the special or to the general commissioners against an assessment, he thinks there should be no assessment until the special commissioners who are very experienced in this matter of assessing what is a reasonable percentage and are more detached and sophisticated than the local inspectors should be able to deal with the affair. That was the point which I thought the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) was seeking to make and it is a point to which I should like to have an answer.

Mr. Diamond: I got the point and my Friend is quite right, but I was trying to deal with the matter in stages. The hon. Member for Wanstead and Woodford was talking about appeals. The taxpayer must have the right of appeal to the general commissioners and the special commissioners. If he says that prior to the inspector of taxes making an assessment he should refer to some other body which had previously had considerable experience in this field, I think that is quite unnecessary and would not add anything at all. I can assure the hon. Member that if I thought it would add anything I should be only too happy to agree, but it would merely clog up the machinery for no useful purpose whatever.
It is far better that the inspector and a dissatisfied taxpayer should have the opportunity of meeting at the same table and talking to each other much more than they do at present. That facility, plus the fact that a whole section of queried cases under the present legislation will be removed by the 60 per cent. formula, will make life a great deal easier and simpler for businessmen in future. I hope that the hon. Member will now allow me to deal with the question of onus of proof.

5.15 p.m.

Mr. Robert Maxwell: Before my hon. Friend deals with the onus of proof, will he bear this in mind? I am sorry to disagree with my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) on this

issue, but the onus of proof in this matter must lie with the taxpayer, not with the Revenue, for a very simple reason. The taxpayer or businessman is peculiarly in possession of and has knowledge of why he wishes to retain surplus. The tax inspector and the commissioners do not know this. That is the reason why onus of proof should lie with the taxpayer and not with the inspector. Even in criminal law one has to be proved guilty by the prosecution except where the individual is peculiarly in possession of all the facts. Then it is up to him to prove the contrary. For that reason the businessman and the taxpayer should be required to bear the onus of proof.

Mr. George Y. Mackie: Hon. Members might be more satisfied about this if we were to have a copy—or, even better, a tape recording—of this afternoon's proceedings, sent with a copy of the Act to those concerned.

Mr. Diamond: I speak with knowledge of the official duties I am privileged for the time being to carry out. I wish to deal with the question of onus of proof and I welcome the intervention made by my hon. Friend the Member for Buckingham (Mr. Maxwell). On the ground of common sense, of consistency, of common law and of criminal law, I should have thought there could be only one answer to this question, and that is what is provided in the Bill. On the ground of common sense we have the situation, which my hon. Friend so clearly pinpointed, that knowledge of the circumstances will be peculiarly within the possession of one individual, one authority alone. It will not be possible for the inspector of taxes unaided to know what is in his mind.

Mr. Harold Lever: How have they managed so far?

Mr. Diamond: My hon. Friend follows an argument without it being expressed with such ease that he jumps to a conclusion before allowing me to get there. If he will allow me to state the arguments, then with the greatest pleasure I will answer any question he puts to me.
The practice at the moment is that it is the taxpayer, often through his professional representative, who makes his case to the special commissioners, because, of course, he is the only person who knows his case and it is to his interests to


establish it. The technical onus is on the Revenue only when there is a dispute and it goes to the courts because of the penal provision to which my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) referred.
On the ground of consistency it would be only right to continue that situation in practice under which it is the individual taxpayer who says, "I am proposing to issue guarantees in respect of South Africa. They may go bad on me. Things are difficult in South Africa and I may be caught out. I need extended assets to cover my liabilities." The reply given to the company to which the right hon. Member for Sutton Coldfield referred would be, "We understand that" and the same understanding would be applied by any inspector of taxes or special commissioners.
They could not possibly know that a particular business was proposing years ahead to develop in a particular way unless the taxpayer said so. How can an inspector know that plans are already laid for a particular factory to be established in three years' time and for the business to be extended? How could the inspector know that 100 per cent. of those profits would be needed over the three years? There is nothing in this legislation to compel any company to issue 1 per cent. by way of dividend. If it needs the whole of the profit to be ploughed back it can plough back every single penny. That is the purpose of this legislation.

Mr. Geoffrey Lloyd: The right how Gentleman is a little wrong in saying that the company would say to the inspector, or to the special commissioners, as it was in the past, "Times are difficult in South Africa. Therefore, we are having to look ahead". It was not like that. The company did not realise that things would be difficult. If it had realised that things would be difficult, it would never have made the investment. It came on the company unexpectedly. This is what may be more difficult to establish with the local inspector of taxes than with the special commissioners.

Mr. Diamond: Neither the right hon. Gentleman nor I know exactly what conversations took place. One assumes that the representations were made generally—"Having regard to the needs of my business, it is necessary to retain so

much", and over the 10 years so much was accumulated. It might, in other circumstances, be a particular project, such as building a new factory, which might take one or two years or more, for which funds must be accumulated for the future.
Once the decision has been made and properly minuted and the matter is moving, there is no reason why the company should not start putting funds by for the purpose. The company must plan on what it is likely to spend in the future, what it will make in net realised profits in the future and, therefore, what it can afford to distribute. The company may come to the conclusion that it cannot afford in that year to distribute a penny.
Therefore, this is within the knowledge of the taxpayer alone. On grounds of common sense and of consistency, it is right that he, the taxpayer, should have the responsibility of explaining the circumstances. I go further and say that I am advised that this is a principle of the common law. My hon. Friend the Minister without Portfolio is here to assist me in this, in case, which I hope will not prove to be so, the Committee does not find it sufficiently satisfying to listen to what I shall say. Where a matter is peculiarly within the knowledge of an individual, the onus of proof is put upon him. I go further and say that I am advised, also, that it is an accepted principle of the criminal law, and there are several examples of it. Where the circumstances are peculiarly within the knowledge of an individual, he has the onus of proving his case.
Therefore, on all these grounds, it will work well and sensibly and as both sides of the Committee would want it to, avoiding fatness, encouraging fitness, encouraging plough-back, and placing the responsibility where it properly lies, if we accept the Bill as it is proposed. I therefore hope that it will not be thought necessary to pursue the Amendment.

Mr. Barber: I rise at this stage only because it is probably for the convenience of the Committee that I should do so. I have no intention of deterring any of my hon. Friends who wish to follow me. Obviously, I would not dream of doing that. Later, we shall debate the whole question of the 60 per cent. which appears in the Bill, and there is an Amendment


to delete 60 per cent. and insert 40 per cent. We shall most certainly have various points to make on the general policy concerning close companies when we debate the Question, "That the Clause stand part of the Bill". I have been most disappointed at the Chief Secretary's reply.

Mr. Maxwell: Why?

Mr. Barber: I will explain why.
We have been debating these two very moderate Amendments for more than an hour. If, when my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) moved the first Amendment, the Chief Secretary had said, "These Amendments may not be worded exactly as we would like them, but, nevertheless, we think that they will do no harm and may do a certain amount of good and we are prepared to introduce something similar on Report", the whole matter could have been disposed of within about 20 minutes. We could then have got on to the general principles concerning close companies which still have to be considered.
I can see the necessity for some special provision dealing with closely controlled companies to prevent the avoidance of tax. The Chief Secretary knows full well that, whatever may be the merits of the particular proposals in this group of Clauses, it is nonsense to say, as he said, that there is consistency between the general policy of the Corporation Tax, which is to encourage retentions, and the particular policy relating to close companies, which is to insist on a certain limit of distributions.
The Chief Secretary said that, under the proposals of the Chancellor of the Exchequer in the Bill, a close company, if it can show good reason, need not distribute even 1 per cent. of its profits. This is true, but this was the position also under the 1952 Act. There is no change.
The Chief Secretary went on to talk about the opportunity to appeal. He talked about the opportunity of taxpayers to discuss these various matters with inspectors of taxes. If these two Amendments were accepted, they would not affect any of the rights of appeal to the special commissioners or to the

general commissioners; nor would they affect the opportunities for individual companies to discuss these matters with inspectors of taxes.

Mr. Maxwell: Why are the ears of right hon. and hon. Members opposite deaf on this issue? Why do they continually charge the Government with inconsistency? Where does the inconsistency lie? The Government are introducing a Corporation Tax which will simplify matters. Someone running a close company might use profits to invest in new plant, to pay better wages, to buy or build a better factory. If the close company is accumulating the money, surely the Government are justified in knowing why it is accumulating it. How is that inconsistent? Surely after all these weeks we on this side, and the country generally, are entitled to know where the inconsistency lies, if it is not just propaganda.

Mr. Barber: I do not wish to detain the Committee. The interventions of the hon. Member for Buckingham (Mr. Maxwell) and of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) at times seem to be designed to prolong our proceedings.
The hon. Gentleman is talking about distribution. He will know, if he has looked at the Amendments, that we are not concerned with that point. That point arises on the next series of Amendments. I certainly do not want to take up the time of the Committee unnecessarily. I will only add very briefly, in answer to the hon. Gentleman, that there seems to me to be something inconsistent between the general policy of the Corporation Tax, which it has been said time and again is to encourage retentions, and the particular policy of these provisions relating to close companies, which is to insist on a certain distribution. I am not saying that on the merits this is necessarily wrong. I am saying that the two policies seem to me to be inconsistent.
I am sorry that the hon. Member for Cheetham has left the Chamber. He said that when he rose to speak he was greeted by howls of indignant rage from hon. Members. This was not so. For our part, this was not our greeting. Our greeting was merely one of surprise that he should, for a change, be supporting the Government—particularly that he


should be supporting the Government when the Committee is discussing an Amendment as reasonable as this.
However, he is not here at the moment. Therefore, I will not weary the Committee by referring to the various points he made. He said in passing that he had not considered every comma of the Amendment. The brains of a lawyer are not required for an analysis of the Amendment. To use the phrase of the Chief Secretary in another context, the Amendment is simplicity itself.
What is the purpose of the legislation concerning close companies which we are now considering? Is it to give some relief to the taxpayer? It is not. Does it have some subtle and deep economic purpose? It does not. Is it to prevent the avoidance of tax. The answer is, "Yes". As the whole purpose of this legislation is to prevent the avoidance of tax, why will the Government not accept the words in the Amendment, which read:
With a view to preventing the avoidance of the payment of income tax through the withholding from distribution of income of a company which would otherwise be distributed, where it appears to the Commissioners of Inland Revenue that"?
5.30 p.m.
The right hon. Gentleman, at an earlier stage, interrupted me to say that the arrangements for considering these matters would be the same as before. Of course, this is true so far as the appeal procedure is concerned, but it is by no means true from the point of view of the consideration of these matters in practice. While I can see the advantage of the managing director of a company being able to go just round the corner and talk to an inspector of taxes, I think that the right hon. Gentleman was less than fair when he appeared not to appreciate the disadvantages of switching from consideration by a central body of special commissioners to the inspectors of taxes throughout the country.
After all, uniformity is of great importance in these matters, and it is well known by those people who were concerned with them in practice that when they discussed these matters with the special commissioners they received a uniform approach. There was a body of practice built up and they knew pretty well what was likely to be the reaction of the special commissioners to the individual cases with which they were concerned.
As my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) so rightly said, the question of distribution policy is of the utmost importance to companies. It is not an easy matter to determine. With the greatest respect to the inspectorate, one wonders whether it will really be able to deal with these very important questions as well as they could have been dealt with by the special commissioners.

Mr. Joel Barnett: Surely the right hon. Gentleman will appreciate that under the original arrangement an accountant would have to go with a director, often together with counsel and a solicitor. This involved four reasonably busy people having to go to Wimbledon to deal with the matter, when it could have been dealt with locally by the local inspector of taxes.

Mr. Barber: I can meet that argument by saying that I recognise that under the legislation as it is now drawn up in the Bill, because there will be so many additional cases involved, it is necessary that these matters should be considered by the local inspectors and not by the special commissioners. For practical reasons it would not be possible for all these cases to be considered by the special commissioners. I accept that this must be so. But it is because we are faced with this position that it seems to me that the words which we propose to insert at the beginning of Clause 72, which make it necessary for an inspector, before he proceeds, to ensure that the matter is considered by the Commissioners of Inland Revenue, are of importance.
In other words, if of necessity one is changing to a system whereby the inspectors of taxes rather than the special commissioners deal with the matter in the first instance, I think that in the interests of uniformity and for the various reasons which were referred to by my hon. Friend in moving the Amendment, it is highly desirable that there should be this provision whereby the case has to be referred to the Commissioners of Inland Revenue before action is taken.
What seems to me to be the most compelling reason of all for accepting the Amendment is that the words in the Amendment are almost identical with the


opening words of Section 245 of the Income Tax Act, 1952. I see the point made by the Chief Secretary concerning the difference between the provisions in Section 245 and the provisions in the Bill. Nevertheless, I should like to read the opening words of Section 245. I do this in the light of the fact that the Chief Secretary has made great play of the undoubted fact that many of the provisions which were applicable to the old Surtax companies are also applicable to close companies. He said, in particular, that the criteria concerning retentions are broadly the same in the Bill as they are in this Act.
The opening words of Section 245 of the 1952 Act are:
With a view to preventing the avoidance of the payment of surtax through the withholding from distribution of income of a company which would otherwise he distributed, it is hereby enacted that where it appears to the Special Commissioners that any company to which this section applies has not
distributed to its members a reasonable part of its actual income, the commissioners may issue a Surtax direction.
Compare those words with the words in this Amendment, which read as follows:
With a view to preventing the avoidance of the payment of income tax through the withholding from distribution of income of a company which would otherwise be distributed, where it appears to the Commissioners of Inland Revenue that".
These words are almost identical. The right hon. Gentleman said that he did not think they added much. But what possible harm can they do if they are accepted? This is what worries me. After listening to the right hon. Gentleman, I am beginning to think that there is something subtle underlying his rejection of this Amendment, because it can do no harm whatsoever. Whatever views one may have about the onus of proof—and certainly I would not wish to go as far as the hon. Member for Cheetham went—nevertheless I would have thought it was reasonable to accept the Amendment, which does something, albeit in a modest form, for the aggrieved taxpayer.
In those circumstances, in the light of what the Chief Secretary said, I could not possibly advise my hon. Friend to

withdraw the Amendment and I hope that we shall take it to a Division.

Sir T. Brinton: I support my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) in pressing for the Government's agreement to the acceptance of this Amendment. The Government owe the business community every reassurance that they can give. The original wording of the Clause struck an absolute chill in the heart of every businessman who was affected by it. I appreciate that there are many hon. Members opposite who have never even run a whelk stall, but those of us who have to run something like that, or something bigger, do, in distinction to what is often suggested, keep a sharp eye on the taxation that we are likely to incur as a result of Government action.
The importance to the business community of reassurance is this. They started out with the assumption—and it will take a long time to get it out of their heads—that this Clause was a very direct attack on the smaller companies and those in which there was any considerable family interest. One point which has not been made today, curiously enough, is that the reason why it is essential that the Clause should be drafted to reassure people is that the Government have brought into its ambit a very large number of companies which were not in the original net under Section 245 of the 1952 Act.
I must here declare an interest. My own company is a close family company, and it was and still is a Surtax direction company. In my own industry two at least of the very largest manufacturers in the country now find themselves caught by Clause 72. In their opinion, certainly one of them and probably the other as well, both nationally-known household names, suddenly find themselves caught by this Section with the prospect that their investment decisions will be affected by the action of the tax inspector or the commissioners. These people need all the reassurance that can be given to them, and this Amendment is designed to provide some reassurance.
Moreover, on the question of onus of proof this would also be of great reassurance to the business community. I thoroughly agree with the hon. Member for Manchester, Cheetham (Mr. H. Lever) that if the onus of proof can be


put even theoretically on the Revenue in such cases it would be some consolation to these companies. Obviously, it can be done. I accept what the Chief Secretary said—that ultimately, in practice, the managing director has to justify his attitude when an attempt is made to raise an assessment on him, but there is a distinct difference between having the onus placed upon him and having it placed upon the Revenue.
The Chief Secretary made a great point of the fact that the only reason for the onus being placed on the Revenue under Section 245 of the 1952 Act was the penal nature of the tax which might be incurred in the event of the case going against the taxpayer. What worries me and many other businessmen is that as far as the Revenue is concerned it is probable that the amount which might be in question would be greater under this Clause than it was under Surtax direction.
Here we have a pay-out which bears a rate of tax equivalent to something like 60 per cent. additional on the money which otherwise would have been retained. The amount which the Revenue will have at stake in any argument under this Clause will be greater than it ever had in the usual case under Surtax direction. The Revenue has a duty to collect the maximum amount of tax and it would naturally occur to any businessman that there is a strong temptation to the tax inspector to take a stricter view under this Clause than was taken of Surtax direction under Section 245.
I accept that the Government have greatly alleviated the apparent intention behind the Clause by means of Amendment No. 707 without altering the position and we ask them for this further concession. We ask them to accept this small alteration in the onus of proof.

Mr. Alan Hopkins: It will be useful possibly to go back to the real nature of close companies. The Chief Secretary will be aware that the vast majority of them are small and are mostly family companies employing 20 to 30 people. These companies suffer a disadvantage compared with the larger ones, and certainly with public companies, in that the source of funds available to them, other than the initial capital put in by the families, is limited

to bank borrowing. It is not open to the small private company to go to an insurance company or some other institution to raise a substantial sum of money in the form of debentures or something of that kind for expansion of its business.
Under the rules operated by the special commissioners in Wimbledon, if a private company which is clearly a close company in furtherance of an expansion programme has incurred a substantial bank overdraft it is unlikely that any requirement will be made about the distribution even of a token dividend from the company's profits. As I read Clause 72, it seems fairly certain that the burden of proof will be largely changed from what it is at present. In the first place, the benefit of the expertise in Wimbledon will no longer be available. I can understand the point made by the Chief Secretary, but this new proposal is an imposition on a businessman, who normally leaves it to his accountants to go to Wimbledon to clarify his position and obtain a clearance. There is no advantage in going to the local inspector, who may even be a busier man than those in Wimbledon.
It is possible to get a tax clearance in Wimbledon where there is all the expertise. If the Chief Secretary will not give way, I hope that it will be made quite clear that the local inspector of taxes, upon whom will now fall the burden of determining whether or not the company is a Surtax company and what level of distribution must be made by it, will have in mind the same rules as now apply in the minds of the special commissioners in Wimbledon.
5.45 p.m.
I declare an interest in that I am a director of three close companies. This is a real worry to people, particularly where a business is expanding and a great deal of that expansion is paid out of the profits of the business. There is the worry lest the present position should be challenged. I do not intend to go over the ground which has been covered so ably by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), but there is a real point behind the Amendment and if the Chief Secretary could think again about it life would be made much easier for the businessman.

Mr. Maxwell: I am glad that the Chief Secretary will not yield to this Amendment. I agree with the right hon. Member for Altrincham and Sale (Mr. Barber) that the words are extremely reasonable, but I should like to give the basic reason why the Amendment should not be accepted.
The purpose of the Budget is to encourage investment. Even hon. and right hon. Members opposite must admit that the country needs more investment if we are to right our balance of payments and become more competitive in exports. It is no good hon. and right hon. Members opposite saying that they agree that we need more investment and yet, every time that the Government introduce legislation which is likely to encourage businessmen to invest, make special pleas why they should be given exemption. Where is the patriotism and good sense of hon. and right hon. Members opposite that they try to have an Amendment of this kind accepted?
Businessmen who have been owning and running close companies have been too long largely concerned with building up cash balances or assets which they could sell sooner or later for capital profits. The purpose of the Budget is to say once and for all to businessmen who run those companies, "You are as free as the birds in the air to do what you like as long as you use the cash for productive investment, not for stashing away and paying out as capital gains."

Mr. Harold Lever: I hesitate to interfere with any flow of oratory on general matters which is not interfered with by the Chair, but I must draw my hon. Friend's attention to one point. None of us is attempting to defend the stashing away of cash. The narrow point we are discussing is whether the Revenue should prove that the taxpayer has been avoiding tax by retaining money in the company or whether the taxpayer should have the onus of proof. What we are worried about is only the question of onus of proof. The question of principle which my hon. Friend has been enunciating does not arise.

Mr. Maxwell: I mentioned the question of onus of proof in an earlier intervention. As a businessman, I am peculiarly in possession of the facts about what I wish my company to do in the

next year or two, and, with the best will in the world, neither the tax inspector or the special commissioners can decide this. It is for me to explain to the tax inspector that I have certain commitments or plans for which I need these retentions. Since the inspector has been very reasonable with Surtax direction companies in the past in allowing this, where the taxpayer could make his case, and since the wording used in the Bill is almost identical with previous wording, why not leave it at that?
To suggest that the purpose of the Amendment is to introduce these words with the idea that the Clause is to deal merely with tax avoidance is not true. The purpose of the Clause as it stands is to encourage close companies to use their cash and resources to invest in the first instance. Right hon. and hon. Members opposite may not like it, but that happens to be true. If they care about the health of British enterprise and our economy, they should not be taking up two hours of this Committee's time on a matter which we could have disposed of in 20 minutes. The purpose of the Budget is to encourage investment. It will not interfere in any way with the freedom of any businessman to do precisely as he wants to do except stash money away and use it for non-productive purposes in the hope that, one day, he will get it out as a capital gain.

Sir Lionel Heald: I must make a few observations about onus of proof. I should yield to no one in admiration of the Chief Secretary's knowledge of anything to do with taxation, but, when we come to questions of law, some of us are entitled to have views of our own. With great respect, I put it to the right hon. Gentleman that he has confused two matters. There is the onus of proof as regards specific facts, and there is the general onus of proof in a case, and an understanding of this is elementary to an examination of the question. We are concerned here with the general onus of proof, the benefit of the doubt. The facts having been proved by the people who can prove them, the commissioners have then to decide their view. It is very important to understand what will happen if the matter is left in doubt. On the question of onus of proof, there is a Latin expression, "Praesumitur pro negante"—the facts


known to one person alone cannot be proved by another. Clearly, if a fact is not proved by someone who knows, it cannot be proved at all.

Mr. Maxwell: Hear, hear.

Sir L. Heald: That is quite different from the general onus of proof, and I am sure that, although he may not realise it, the hon. Member for Buckingham (Mr. Maxwell) does not really mean to say say "Hear, hear". He ought to accept the view of his hon. Friend the Member for Cheetham (Mr. Harold Lever) which I share.

Mr. Gower: I make a final appeal to the Chief Secretary. He has complained about unreasonable and unjustified fears entertained by businessmen concerned about close companies. He can remove some of these fears by accepting the Amendment. Businessmen suspect that he wants to do more than he says he is doing. He has said already that it would be wrong for this procedure to be used by companies to avoid taxation. Businessmen accept that, but they suspect that these provisions will do far more. They suspect that these provisions will hit close companies very harshly, more harshly than other taxation will hit larger companies.
All the right hon. Gentleman has to do to remove these unjustified fears is to accept the Amendment and insert a provision which has a respectable antecedent, a provision which has been enshrined in another similar Statute. If he does that, he will go a long way to remove or make unnecessary some of the fears which are felt.
The very fact that cases are now to be moved to inspectors rather than to the special commissioners gives rise to doubt. I share the view which has been expressed that the special commissioners have a long experience in dealing with these matters, and when the Chief Secretary

says, in effect, that inspectors will soon acquire similar experience and soon become equally able in dealing with these matters, he gives rise to a further fear. Some people see in this a sinister hint, that there are likely to be many more cases than under the old practice. Are there to be so many more cases, and, if so, why? The only answer is that this provision is going to be rather harsh on the companies which it affects.

The Chief Secretary has brought his hon. and learned Friend the Financial Secretary with him, and he said that, perhaps, his answer about onus of proof was not satisfactory. I hope that, in the light of what has been said by my right hon. and learned Friend the Member for Chertsey (Sir L. Heald), he will feel that it is quite unsatisfactory. It is no answer to say that, because a penal sanction has been removed, the change of practice is justified. If the previous practice as regards onus of proof in the former case was right, it is right now. The Revenue has all the big guns in dealing with the fairly small company. It has all the advantages except specialised knowledge of the matter in question.

The right hon. Gentleman must realise that in matters of this sort judgment is of great importance. The case put to him by my right hon. Friend for Sutton Coldfield (Mr. Geoffrey Lloyd) was not that the man had prior knowledge of the difficulty which would arise in the future. It was that the person running the affairs of his company in a careful and frugal way, based on his experience, made a provision which he might not have made had he been pressed by an inspector of taxes to make a disproportionate or very large distribution. I hope that the right hon. Gentleman will take all these matters into account.

Question put, That "If" stand part of the Clause:—

The Committee divided: Ayes 206, Noes 199.

Division No. 188.]
AYES
[5.58 p.m.


Abse, Leo
Benn, Rt. Hn. Anthony Wedgwood
Brown, Rt. Hn. George (Belper)


Allaun, Frank (Salford, E.)
Bennett, J. (Glasgow, Bridgeton)
Buchan, Norman (Renfrewshire, W.)


Aldritt, Walter
Bishop, E. S.
Buchanan, Richard


Allen, Scholefield (Crewe)
Blackburn, F.
Butler, Herbert (Hackney, C.)


Armstrong, Ernest
Blenkinsop, Arthur
Callaghan, Rt. Hn. James


Atkinson, Norman
Boardman, H.
Carmichael, Neil


Bacon, Miss Alice
Bowden, Rt. Hn. H. W. (Leics, S. W.)
Carter-Jones, Lewis


Bagier, Gordon A. T.
Braddock, Mrs. E. M.
Castle, Rt. Hn. Barbara


Beaney, Alan
Bray, Dr. Jeremy
Coleman, Donald




Conlan, Bernard
Hunter, A. E. (Feltham)
Pearson, Arthur (Pontypridd)


Corbet, Mrs. Freda
Irving, Sydney (Dartford)
Peart, Rt. Hn. Fred


Craddock, George (Bradford, S.)
Jackson, Colin
Pentland, Norman


Crossman, Rt. Hn. R. H. S.
Janner, Sir Barnett
Perry, Ernest G.


Cullen, Mrs. Alice
Jay, Rt. Hn. Douglas
Popplewell, Ernest


Dalyell, Tam
Jeger, George (Goole)
Price, J. T. (Westhoughton)


Davies, G. Elfed (Rhondda, E.)
Johnson, Carol (Lewisham, S.)
Probert, Arthur


Davies, Ifor (Gower)
Jones, Dan (Burnley)
Pursey, Cmdr. Harry


Davies, S. O. (Merthyr)
Kelley, Richard
Randall, Harry


Diamond, John
Kenyon, Clifford
Rankin, John


Dodds, Norman
Kerr, Dr. David (W'worth, Central)
Rees, Merlyn


Doig, Peter
Lawson, George
Rhodes, Geoffrey


Donnelly, Desmond
Leadbitter, Ted
Richard, Ivor


Driberg, Tom
Lee, Rt. Hn. Frederick (Newton)
Roberts, Albert (Normanton)


Duffy, Dr. A. E. P.
Lever, Harold (Cheetham)
Robertson, John (Paisley)


Dunn, James A.
Lever, L. M. (Ardwick)
Rodgers, William (Stockton)


Edwards, Rt. Hn. Ness (Caerphilly)
Lewis, Arthur (West Ham, N.)
Sheldon, Robert


English, Michael
Lewis, Ron (Carlisle)
Shinwell, Rt. Hn. E.


Ennals, David
Lipton, Marcus
Shore, Peter (Stepney)


Ensor, David
Lomas, Kenneth
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)


Evans, Ioan (Birmingham, Yardley)
Loughlin, Charles
Short, Mrs. Renée (W'hampton, N. E.)


Fitch, Alan (Wigan)
McBride, Neil
Silkin, John (Deptford)


Fletcher, Sir Eric (Islington, E.)
MacDermot, Niall
Silverman, Julius (Aston)


Fletcher, Ted (Darlington)
McGuire, Michael
Silverman, Sydney (Nelson)


Fletcher, Raymond (Ilkeston)
McInnes, James
Slater, Mrs. Harriet (Stoke, N.)


Floud, Bernard
McKay, Mrs. Margaret
Slater, Joseph (Sedgefield)


Foley, Maurice
Mackenzie, Gregor (Rutherglen)
Small, William


Fraser, Rt. Hn. Tom (Hamilton)
Mackie, John (Enfield, E.)
Snow, Julian


Freeson, Reginald
McLeavy, Frank
Soskice, Rt. Hn. Sir Frank


Galpern, Sir Myer
MacMillan, Malcolm
Steele, Thomas (Dunbartonshire, W.)


Garrett, W. E.
Mahon, Simon (Bootle)
Stewart, Rt. Hn. Michael


George, Lady Megan Lloyd
Manuel, Archie
Stonehouse, John


Ginsburg, David
Mapp, Charles
Stones, William


Gourlay, Harry
Mason, Roy
Summerskill, Hn. Dr. Shirley


Greenwood, Rt. Hn. Anthony
Maxwell, Robert
Swingler, Stephen


Gregory, Arnold
Mayhew, Christopher
Symonds, J. B.


Griffiths, David (Rother Valley)
Mellish, Robert
Taverne, Dick


Griffiths, Rt. Hn. James (Llanelly)
Mendelson, J. J.
Taylor, Bernard (Mansfield)


Griffiths, Will (M'chester, Exchange)
Mikardo, Ian
Thomas, George (Cardiff, W.)


Hale, Leslie
Millan, Bruce
Thornton, Ernest


Hamilton, James (Bothwell)
Miller, Dr. M. S.
Tinn, James


Hamilton, William (West Fife)
Milne, Edward (Blyth)
Urwin, T. W.


Hannan, William
Molloy, William
Varley, Eric G.


Harper, Joseph
Morris, Alfred (Wythenshawe)
Wainwright, Edwin


Harrison, Walter (Wakefield)
Morris, Charles (Openshaw)
Walden, Brian (All Saints)


Hart, Mrs. Judith
Morris, John (Aberavon)
Walker, Harold (Doncaster)


Hattersley, Roy
Murray, Albert
Wallace, George


Hazell, Bert
Neal, Harold
White, Mrs. Eirene


Henderson, Rt. Hn. Arthur
Newens, Stan
Whitlock, William


Herbison, Rt. Hn. Margaret
Noel-Baker, Francis (Swindon)
Wilkins, W. A.


Hill, J. (Midlothian)
Norwood, Christopher
Willey, Rt. Hn. Frederick


Hobden, Denis (Brighton, K'town)
Oakes, Gordon
Williams, Clifford (Abertillery)


Holman, Percy
Ogden, Eric
Williams, W. T. (Warrington)


Horner, John
O'Malley, Brian
Willis, George (Edinburgh, E.)


Houghton, Rt. Hn. Douglas
Oram, Albert E. (E. Ham, S.)
Winterbottom, R. E.


Howarth, Harry (Wellinborough)
Orme, Stanley
Yates, Victor (Ladywood)


Howie, W.
Oswald, Thomas
Zilliacus, K.


Hoy, James
Owen, Will



Hughes, Emrys (S. Ayrshire)
Padley, Walter
TELLERS FOR THE NOES:


Hughes, Hector (Aberdeen, N.)
Park, Trevor (Derbyshire, S.E.)
Mr. George Rogers and


Hunter, Adam (Dunfermline)
Pavitt, Laurence
Mr. John McCann.




NOES


Agnew, Commander Sir Peter
Bossom, Hn. Clive
Cooper-Key, Sir Neill


Alison, Michael (Barkston Ash)
Bowen, Roderic (Cardigan)
Cordle, John


Allason, James (Hemel Hempstead)
Box, Donald
Costain, A. P.


Anstruther-Gray, Rt. Hn. Sir W.
Boyd-Carpenter, Rt. Hn. J.
Courtney, Cdr. Anthony


Astor, John
Boyle, Rt. Hn. Sir Edward
Craddock, Sir Beresford (Spelthorne)


Awdry, Daniel
Braine, Bernard
Crosthwaite-Eyre, Col. Sir Oliver


Balniel, Lord
Brewis, John
Cunningham, Sir Knox


Barber, Rt. Hn. Anthony
Brinton, Sir Tatton
Curran, Charles


Barlow, Sir John
Brooke, Rt. Hn. Henry
Davies, Dr. Wyndham (Perry Barr)


Batsford, Brian
Brown, Sir Edward (Bath)
d'Avigdor-Goldsmid, Sir Henry


Bell, Ronald
Bruce-Gardyne, J.
Dean, Paul


Bennett, Sir Frederic (Torquay)
Bullus, Sir Eric
Deedes, Rt. Hn. W. F.


Bennett, Dr. Reginald (Gos &amp; Fhm)
Burden, F. A.
Digby, Simon Wingfield


Berkeley, Humphry
Buxton, Ronald
Dodds-Parker, Douglas


Berry, Hn. Anthony
Cary, Sir Robert
Douglas-Home, Rt. Hn. Sir Alec


Bessell, Peter
Chichester-Clark, R.
Drayson, G. B.


Biffen, John
Clark, William (Nottingham, S.)
Eden, Sir John


Biggs-Davison, John
Clarke, Brig. Terence (Portsmth, W.)
Elliot, Capt. Walter (Carshalton)


Birch, Rt. Hn. Nigel
Cole, Norman
Elliott, R. W.(N'c'tle-upon-Tyne, N.)


Black, Sir Cyril
Cooke, Robert
Emery, Peter







Errington, Sir Eric
Legge-Bourke, Sir Harry
Ramsden, Rt. Hn. James


Eyre, Reginald
Lewis, Kenneth (Rutland)
Rawlinson, Rt. Hn. Sir Peter


Farr, John
Lloyd, Rt. Hn. Geoffrey (Snt'nC'dfield)
Renton, Rt. Hn. Sir David


Fisher, Nigel
Lloyd, Ian (P'tsm'th, Langstone)
Ridley, Hn. Nicholas


Fletcher-Cooke, Sir John (S'pton)
Lloyd, Rt. Hn. Selwyn (Wirral)
Ridsdale, Julian


Foster, Sir John
Longden, Gilbert
Roberts, Sir Peter (Heeley)


Fraser, Ian (Plymouth, Sutton)
Lubbock, Eric
Robson Brown, Sir William


Gammans, Lady
Lucas, Sir Jocelyn
Roots, William


Giles, Rear-Admiral Morgan
McAdden, Sir Stephen
St. John-Stevas, Norman


Glover, Sir Douglas
MacArthur, Ian
Sharples, Richard


Godber, Rt. Hn. J. B.
Mackenzie, Alasdair (Ross &amp; Crom'ty)
Sinclair, Sir George


Goodhew, Victor
Mackie, George V. (C'ness &amp; S'land)
Spearman, Sir Alexander


Gower, Raymond
McMaster, Stanley
Stainton, Keith


Grant, Anthony
McNair-Wilson, Patrick
Stanley, Hn. Richard


Grieve, Percy
Maitland, Sir John
Steel, David (Roxburgh)


Griffiths, Peter (Smethwick)
Marten, Neil
Stodart, Anthony


Grimond, Rt. Hn. J.
Maude, Angus
Stoddart-Scott, Col. Sir Malcolm


Gurden, Harold
Maudling, Rt. Hn. Reginald
Studholme, Sir Henry


Hall-Davis, A. G. F.
Mawby, Ray
Talbot, John E.


Hamilton, M. (Salisbury)
Maxwell-Hyslop, R. J.
Taylor, Edward M. (G'gow, Cathcart)


Harris, Frederic (Croydon, N.W.)
Maydon, Lt.-Cmdr. S. L. C.
Taylor, Frank (Moss Side)


Harris, Reader (Heston)
Meyer, Sir Anthony
Thomas, Rt. Hn. Peter (Conway)


Harvey, John (Walthamstow, E.)
Mills, Peter (Torrington)
Thompson, Sir Richard (Croydon, S.)


Harvie Anderson, Miss
Mills, Stratton (Belfast, N.)
Thorneycroft, Rt. Hn. Peter


Hawkins, Paul
Mitchell, David
Thorpe, Jeremy


Heald Rt. Hn. Sir Lionel
Monro, Hector
Turton, Rt. Hn. R. H.


Heath, Rt. Hn. Edward
More, Jasper
van Straubenzee, W. R.


Higgins, Terence L.
Morrison, Charles (Devizes)
Walder, David (High Peak)


Hill, J. E. B. (S. Norfolk)
Munro-Lucas-Tooth, Sir Hugh
Walker, Peter (Worcester)


Hobson, Rt. Hn. Sir John
Murton, Oscar
Walker-Smith, Rt. Hn. Sir Derek


Hordern, Peter
Nicholson, Sir Godfrey
Wall, Patrick


Hornsby-Smith, Rt. Hn. Dame P.
Noble, Rt. Hn. Michael
Walters, Dennis


Howard, Hn. G. R. (St. Ives)
Nugent, Rt. Hn. Sir Richard
Ward, Dame Irene


Hunt, John (Bromley)
Onslow, Cranley
Weatherill, Bernard


Hutchison, Michael Clark
Osborn, John (Hallam)
Webster, David


Iremonger, T. L.
Page, R. Graham (Crosby)
Whitelaw, William


Irvine, Bryant Godman (Rye)
Pearson, Sir Frank (Clitheroe)
Williams, Sir Rolf Dudley (Exeter)


Jenkin, Patrick (Woodford)
Peel, John
Wills, Sir Gerald (Bridgwater)


Jennings, J. C.
Percival, Ian
Wilson, Geoffrey (Truro)


Johnson Smith, G. (East Grinstead)
Peyton, John
Wood, Rt. Hn. Richard


Johnston, Russell (Inverness)
Pickthorn, Rt. Hn. Sir Kenneth
Woodhouse, Hn. Christopher


Kerr, Sir Hamilton (Cambridge)
Pike, Miss Mervyn
Yates, William (The Wrekin)


Kershaw, Anthony
Pitt, Dame Edith
Younger, Hn. George


Kilfedder, James A.
Pounder, Rafton



King, Evelyn (Dorset, S.)
Powell, Rt. Hn. J. Enoch
TELLERS FOR THE NOES:


Kirk, Peter
Prior, J. M. L.
Mr. Martin McLaren and


Lancaster, Col. C. G.
Pym, Francis
Mr. Dudley Smith.


Langford-Holt, Sir John
Quennell, Miss J. M.

The Temporary Chairman (Mr. Grant-Ferris): The next Amendment that I shall call is No. 707, in the name of the Chancellor of the Exchequer. It might be for the convenience of the Committee if I say that with it we can take the Amendment to the Chancellor's proposed Amendment—to leave out "sixty" and to insert "forty"—which is in the name of the right hon. Member for Bexley (Mr. Heath), but which, I understand, will be moved by the hon. Member for Nottingham, South (Mr. William Clark), and also Amendment No. 629, in page 93, line 5, after "say", insert:
in the case of a trading company sixty per cent. of the distributable investment income and of the estate or trading income for the period and in any other case",

Amendment No. 78, in line 34, after "are", insert "not", Amendment No. 79, in line 34, leave out "not", Amendment No. 100, in line 36, after "business", insert:

and provided that in such consideration by the Commissioners the position of companies in development areas will receive special consideration.",
Amendment No. 80, in line 37, after "are", insert "not", and Amendment No. 81, in line 38, leave out "not".

It will be in order for the hon. Member for Nottingham, South to speak on his Amendment to the Chancellor's proposed Amendment at any time during the discussion when he catches my eye and move it formally at the end of the debate.

Mr. Diamond: I beg to move, Amendment No. 707, in page 93, line 5, to leave out from "standard" to "a" in line 8, and to insert:
; and the required standard is the distributable income for the period, less so much of that income (not exceeding, in the case of a company which is neither a trading company nor a member of a trading group, the amount of the estate or trading income) as the company shows could not be distributed without


prejudice to the requirements of the company's business:
Provided that the required standard shall in no case exceed the company's distributable investment income for the period plus sixty per cent. of the estate or trading income of the period, and for the purpose of this proviso in its application to".
Perhaps it will be convenient, Mr. Grant-Ferris, if I move this Amendment shortly. A number of other discussions will take place and any point that I do not cover now can be referred to later on.
This Amendment puts the required standard for distribution in a different way. In effect, it makes it clear that the calculation proceeds not as was feared but on a normal practical basis of ascertaining what are the needs of the company. It then brings in the 60 per cent. of net trading income and the 100 per cent. of investment income as the greatest amount which can be required to be distributed under the Clause. I am sure that I do not need to delay the Committee on the question of 100 per cent. of investment income. That is the situation at the moment and it will continue to be the situation because, of course, it cannot ever be claimed that it is necessary to build up reserves of investment income prior to investing. Therefore, one is not concerned with anything less than 100 per cent. of investment income; but one may be so concerned with trading income, which means net trading income after payment of Corporation Tax.
The second Government Amendment brings in what is now paragraph 10 of the 17th Schedule. It is clear that it had escaped attention. I think that it was the right hon. Member for Bexley (Mr. Heath) who made the point that it was tucked away in a Schedule and that, as it had already been provided for, it was better to put it into this Clause and thereby get rid of any misunderstandings which had accumulated around this provision.
The third Government Amendment means that the substance of subsection (5) will be written into subsection (2). The remaining Amendments are consequential. I will listen very carefully to the comments about to be made on the Amendments under discussion with them.

Mr. William Clark: I understand, Mr. Grant-Ferris, that it would be convenient and probably more in order, if the Amendment to Amendment No. 707 were moved at the end of the discussion. If you agree to that, then I will speak now to the Amendment to the Amendment, which would reduce the figure proposed from 60 per cent. to 40 per cent.
It would be as well to find out, if we can, why the Government decided on a 60 per cent. distribution as being the norm, if one might put it that way, of distribution for close companies.

Mr. Diamond: "Ceiling" would be better.

Mr. Clark: We can call it "ceiling" if the right hon. Gentleman does not like "norm". The position at the moment is that, if one has a profit of £100, under present legislation one pays 15 per cent. Profits Tax which leaves in hand £85 on every £100. The right hon. Gentleman will agree, I am sure, that under Section 245 of the Income Tax Act, 1952, it is usual, if one distributes about 40 per cent. of one's profit, for the Special Commissioners not to make a direction.
It is fallacious to say that the penalty of 100 per cent. distribution was there. Of course, we accept that there was a penalty of 100 per cent. Distribution; that is in the example I am giving of £85. But no professional man advising his client would allow him to put in any accounts to the Inland Revenue showing no distribution at all. He would advise his clients, "You are a Surtax company. If you do not put in some distribution you will be penalised and the penalty could be £85." According to my example, therefore, it would be 100 per cent.
Secondly, there has been built up a practice between accountants, taxpayers and the Special Commissioners that, where about 40 per cent. was distributed, this would leave sufficient to overcome Surtax direction. If we follow that in my example we get, under present legislation, £100 profit less Profits Tax of £15, leaving £85. Forty per cent. of that is £34. Consequently, if one were to advise the client to distribute 34 per cent. no Surtax would arise.
Under the new legislation, £100 provides 40 per cent. Corporation Tax, which leaves one with 60 per cent., of £60. If one had 60 per cent. distribution as a ceiling, this would leave £36 to be distributed. That is why the Government decided on a 60 per cent. distribution.
6.15 p.m.
I think that we have to look a little further to see what would be the practical effects of this Corporation Tax on such a comparison. Under the old system, one had £100 profit and from that profit one was entitled to deduct certain charges which are now not to be liable as deductions under this Bill; these are, for example, rent to a participator and certain interests to participators which were allowed under the present legislation.
One had abatement of Profits Tax at one-fifth of the difference between £2,000 and £12,000 gross profit. To consider the difference and take it into account between the old and the new legislation in this sense is misleading, because one does not have the deductions under the new legislation that one had under the old.
If, under the old system, one had £100 profit and charges were £20, which is not out of line with what charges normally are, this gave a profit of £80, on which Profits Tax of 15 per cent. was paid. This was £12, leaving £68. On that, one got a Surtax direction under Section 245 of about 40 per cent. If one takes 40 per cent. of £68, the total is £27, which must be distributed, and if the accountant had said that £27 is a distribution to obviate a Surtax direction this leaves the company with £41 actual profit on which it then pays 8s. 3d. in the £, making a total of £17, leaving it, on each £100, some £24 retention even after the Surtax direction.
Under the present legislation, we have £100 profit less the charges which are not to be allowed, which gives £80 profit. One will have to add Corporation Tax.

Mr. Harold Lever: Why does the hon. Gentleman say that charges will not be allowed before calculating profit, whereas in 99·9 per cent. of cases the interest charge will be allowed?

Mr. Clark: I should be ruled out of order if I anticipated the Schedules. The hon. Gentleman the Member for Manchester, Cheetham (Mr. Harold Lever) should realise that there is a fundamental difference between the application of Corporation Tax and the application of the old Profits Tax. For one thing, one has not the abatement between £2,000 and £12,000. One has a lower abatement but not a one-fifth abatement. One is not to be allowed now to pay legitimate charges to participators. However, I am sure that we can return to this point when we reach the Schedules. The Committee will appreciate the effect of the difference between 40 per cent. and 60 per cent. distribution on a company.
I should like to carry on with the figures which I was giving before the hon. Member for Cheetham interrupted. With a profit of £100, less charges of £20, giving £80, 40 per cent. of the £100—because charges are not allowed under this legislation—would give a net profit of £40. With the 60 per cent. distribution, which is £36, that leaves £4 retention as opposed to £24 retention under the present legislation. I urge the hon. Member for Cheetham to do a little arithmetic when he will see that even if he does not accept the figure of £20 for charges which are disallowed and taking even £10 or £5, the retentions are lower.
The tax payable under the old system was £12 Profits Tax, £17 Income Tax and Income Tax and Surtax of £13 on the Section 245 direction, a total tax of £42. The Chief Secretary can deny my figures if he wishes. Under the new system, with £100 profit, the Corporation Tax is £40 and Income Tax and Surtax—and for the purposes of calculation I have taken the same proportions in both examples, so that Surtax is at 10s. in the £—are £18, so that there is a total of £58 in tax as against £42 under the old system.
How can anybody—even adjusting those figures slightly—say that that is not penalising the small company? It is all very well for the Chief Secretary to say that there is the long stop of being able to prove to the local inspector of taxes that the 60 per cent. is far too high, but with his experience the right hon. Gentleman knows that the inspector will take the easy way out and raise an assessment of 60 per cent. distribution.


There will be an argument between the inspector and the accountant and eventually the figure may come down.

Mr. Diamond: In view of his remark, the hon. Gentleman will not mind my saying that he must now be making a political speech and not drawing on his own practical professional experience.

Mr. Clark: The same point was made very validly by one of my hon. Friends in the last debate when he said that with so many inspectors throughout the country without the specialised knowledge of the special commissioners, they would often take the easy way out of saying that there should be a 60 per cent. distribution. I assure the Chief Secretary that this is not a political point, but purely an economic argument. I do not think that any hon. Member, particularly on this and subsequent Amendments, will make merely political points.

Mr. Maxwell: Is the hon. Gentleman saying that an inspector of taxes would act contrary to the national interest and instructions from the Treasury to encourage investment?

Mr. Clark: The hon. Gentleman, who listens and absorbs what he thinks he will absorb, has not listened to my examples. I showed that retentions under the new legislation would be much lower than under existing legislation, even if the figures are slightly adjusted. That is to penalise the small companies.
I have a few more examples which are relevant and I hope that the Chief Secretary will give some thought to them, as he always does. I have worked out these figures with great care. A married man, who is the director of a close company and who holds the requisite shareholding and so on and who has an earned income of £8,500 and an unearned income which has nothing to do with the company of £500, has a gross income of £9,000. Because of the disallowance of directors' remuneration, which we obviously cannot debate now, Corporation Tax will be on the difference between £8,500 and £3,500, namely, £5,000, and I have taken a rate of 8s. for ease of example and that gives £2,000 Corporation Tax. As a married man with an income of £8,500 plus unearned income, his Income Tax will be £2,748—I will not weary the Committee with the computation, but in fact it is

£2,748 17s. 6d. His Surtax liability is £647 5s. His total tax is thus £5,396 2s. 6d. I am sure that the Chief Secretary would not suggest that the director of a close company earning £8,500 a year was being excessively paid.
On the last £1,000 of earned income of that director—and I think that the Committee will appreciate that it is the marginal rate of tax on any income level which provides the incentive or disincentive—he will pay Corporation Tax at 8s. giving £400, Income Tax of £366 and Surtax of £224, a total tax of £991 4s. 9d. which is an effective rate of 19s. 10d. in the £. I would have thought that that example alone would prove to the Chief Secretary that he will have to look at this matter again.
I will give another example of a man with an earned income of £7,500 and an unearned income of £10,000. Again I will not weary the Committee with all the computation. The effective rate of tax on his last £1,000 of earned income is 23s. 9d. There are other examples of a similar nature.

Mr. Maxwell: How many people in the country would fall under this provision?

Mr. Clark: The hon. Member speaks with his usual naivete. I know that he has great knowledge in these matters, but when he cannot understand, he always asks how many people are affected. All I can tell him is that the examples I have given would concern everybody earning £8,500 per annum in a close company, or £7,500 in a close company with an investment income of £10,000.
This provision will affect the growing companies, those companies which start from small beginnings. How else do we get public companies? How do we get the electronics companies, or whatever they may be, unless they start from small beginnings? This is another example of the Government's desire to have something which looks very nice on paper, but which they have not thought through.
Some of their own figures which they have quoted in answer to the debates have been difficult to understand. Last week the Chief Secretary gave us some figures about Capital Gains Tax. He covered himself and said that he would not give his certificate on the figures. I am sure


that he would not. He said that some Amendments which had been suggested from this side of the Committee would cost £23,500,000, but Capital Gains Tax will produce only £12 million in the first year so how could those proposals cost £23,500,000?

Mr. Diamond: As the hon. Gentleman has quoted a figure, we ought to get it right. I did not say the first year and I did not say Capital Gains Tax. I made it quite clear that we were talking about Corporation Tax and a company which pays Corporation Tax on its capital gains.

6.30 p.m.

Mr. Clark: I accept that. But the Amendment moved by my hon. Friends dealt with Capital Gains Tax. When the Chancellor in his Budget speech said that 8s. 3d. in the £ plus the 15 per cent. Profits Tax was exactly the same as a rate of 35 per cent. Corporation Tax, he did not at the same time say that included in the Corporation Tax was the Capital Gains Tax element of Corporation Tax. This was never made clear and I am sure that between now and Report the Chief Secretary will deal with this.
To return to the reason why we want to reduce the ceiling of 60 per cent. to 40 per cent., it has already been proved by the various examples I have given that the 60 per cent. is not going to result in more retentions. If one makes the implication of Profits Tax exactly the same as Corporation Tax this would be true. This has not been done, however. This is why businessmen throughout the country are fearful of the effects of Corporation Tax. It is all very well for the Chief Secretary to make sympathetic noises and say that the small man has no need to worry, that he is going to help, and he wants them to plough back, the 60 per cent. is a ceiling and so on. Frankly, the ordinary businessman does not, as yet, accept this. The Chief Secretary must answer this, because a 60 per cent. ceiling is, in my opinion, higher than the ceiling we have at the moment and it is quite fallacious to say that the ceiling at the moment is 100 per cent. In practice it is only about 40 per cent.
The Chief Secretary says that no company is going to be penalised providing it does not distribute a lot of its profit if it is a large company. Close companies

have to distribute a lot. For large companies, he says, one cannot distribute so much and they encourage one not to distribute. One cannot have it both ways. The Chief Secretary says that if one pays 51 per cent. of one's profit one does not lose under Corporation Tax. This is true, but what he has not said is that one does not pay a dividend on one's profits. One declares a dividend on one's share capital. It is dependent upon one's profits, but if a company has a profit of £100 at the end of the year and its capital is £1,000 it declares a 6 per cent. dividend and in fact distributes 60 per cent. of its profits. One would not have thought that a 6 per cent. distribution was high, particularly in view of the fact that another Government Amendment, which will be dealt with shortly, gives 7½ per cent.
I do not think that, as yet, the Government have made out a case, not only for the underlying principles of Corporation Tax, but, particularly, for the distribution of 60 per cent. We want to reduce it to 40 per cent. but we are not, obviously, arguing the 40 per cent. providing the Government will accept the validity of the argument. No one wants tax avoidance but what we do not want is for the Government to say that there are some people avoiding paying tax and that they will therefore make jolly sure that everybody pays more tax.
That is exactly what is going to happen under Corporation Tax. The other day the Chancellor said that we were turning the corner. I should have thought that, with this Corporation Tax, we were just about round the bend. We really cannot understand why the Government are so partisan in their approach to this. The last Amendment, which was a very reasonable Amendment, proved this. I hope that when the Chief Secretary answers this he will either refute the examples I have given or else prove conclusively that a 60 per cent. distribution is going to help small businessmen and to help them more than they are helped at present.

Mr. Harold Lever: Before referring to my own Amendment, I think that out of courtesy I might spare a word for the hon. Gentleman the Member for Nottingham, South (Mr. William Clark), who has just spoken. I observe that he invited the Committee to allow its flesh


to creep and the businessmen's flesh to creep on the assumption that the interest charges that a private company or a close company pays will be disallowed. Even if the hon. Member is right the complaint should not be directed to this Clause, but to a later Clause.
When I say we should ignore the disallowance of interest charges in order to evaluate the quality of this Clause I must surely be on impeccable logical grounds because the whole case based upon the disallowance vanishes if, on the later Clauses, the Chancellor voluntarily, or upon the insistence of this Committee, in effect disallows the disallowance or corrects the disallowance of interest charges. In that situation the terrifying examples will only have force if we find that the Chancellor obdurately refuses to make the necessary modifications.
Dealing with interest charges, I have reason to suppose the Chancellor will do nothing of the kind. If we ignore that aspect of that, unless my arithmetic is wrong, and I am always ready to be corrected on arithmetic, it seems that even on the allegations of the hon. Member for Nottingham, South he has no cause for complaint. For my part, from my humble position on this side of the Committee, I welcome the zeal of hon. Members on both sides of the Committee in making quite sure that the taxpayer is not oppressed by the tax gatherer. I think that is one of the fundamental functions of this House and I shall never complain at anyone showing an excessive zeal in defending the taxpayer provided that it is an open minded zeal and not in search of party advantage.
On the basis of 40 per cent. Corporation Tax and an Income Tax of 8s. in the £ and a 15 per cent. Profits Tax, a company which earned £100 under the old legislation paid £55 in Income Tax and Profits Tax and £21 in dividends. Its total outgoings were £76 leaving it with the sum of £24 net. Under the new, penally wicked legislation, proposed by my right hon. Friend which upsets all of this in a most revolutionary manner, what would occur would be that a company would earn £100, pay £40 Corporation Tax and a maximum of £36 in divi-

dends and, amazingly, would be left with precisely the same sum of £24. I am willing to be proved wrong. It seems that on any showing if this is right then this Clause marks an advance in the interests of the taxpayer and is not to his disadvantage.

Mr. William Clark: The hon. Gentleman will agree that if, under the new system, some of the payments are not allowed for Corporation Tax purposes, which will come on later as he says, then, quite obviously, the retentions cannot possibly be the same. I welcome with gratitude his avowed intention to support us if the Chancellor does not change his mind on Corporation Tax.

Mr. Lever: All I am inviting the hon. Member to realise is that his criticism is directed to the wrong Clause and the wrong thing. It is no good saying that the Clause is wrong, assuming that a penal and oppressive enactment occurs later. The answer is to fight the penal and oppressive enactment of disallowing interest charges later. I would not hesitate to say that this would be penal and oppressive and that we should fight it and take counsel together on how to persuade the Chancellor and my right hon. Friend the Chief Secretary and his legal advisers to withdraw this penal and oppressive Clause. I am sure that they would do, because they are not penal and oppressive men.
At present, we are not discussing those Clauses. We are discussing this Clause and one has no right to charge this Clause with being badly drafted if it becomes harmful and oppressive only in the light of subsequent badly conceived matters in relation either to directors' salaries or to interest payments. I sympathise a good deal with the hon. Gentleman's argument that there is something to be said for specialised people deciding these issues and not the Income Tax inspectors. The Thames Ditton special commissioners—lately removed to Wimbledon, I believe—enjoy a high reputation among professional men—lawyers, accountants and businessmen—for their impartiality, sophistication and general understanding of the taxpayers' needs. It may be that my right hon. Friends will think that there is something in the idea of arranging a similar specialisation under these Clauses.
I would say one word of consolation in case the matter is decided against them because I am inclined to the Opposition's view of this point. If the Chancellor of the Exchequer adheres to the view that the inspectors should deal with the matter, he might bear in mind how the special commissioners came by their flexibility, understanding and general expertise in dealing with these matters, namely, by practice.
It is not unreasonable to suppose that in precisely the same manner, after a reasonable time, the very fair-minded inspectors of taxes will be in the same position as the special commissioners. It is a confusion of the term which I tried to elucidate a little while ago, but the special commissioners about whom we are talking are nothing but inspectors of taxes exercising a specialised function.

Mr. Patrick Jenkin: The hon. Gentleman will recognise that the Section 245 legislation has been in existence since 1921 and that, therefore, the special commissioners have had a long time in which to acquire their present expertise and, further, have dealt with every case in the country. No doubt the hon. Gentleman can do more quickly than I the multiplication sum involved in multiplying 44 years by the number of tax districts to show how long it will take the inspectors to acquire the same amount of expertise.

Mr. Lever: In spite of the exceptionally rare compliment to my arithmetical powers, I am unsympathetic to the hon. Gentleman's point of view. We can discuss this point without a great deal of excitement or heat because, although I lean to the Opposition's view about the special commissioners, this does not seem to me a matter of great fundamental importance.
What seem to me to be much more important are the matters dealt with by my Amendments, the effect of which would be to throw the onus of proof on the Revenue before any direction was made. I will read the Clause as it would be if it were amended because I think that the very sound of the Clause in its proposed amended form has a note of sweet reasonableness and good sense which might commend itself to the Committee and, perhaps, to my right hon. Friends:

Where, on an appeal by a company against an assessment made by virtue of this section, the Commissioners concerned are satisfied that the company could make distributions up to the required standard"—
that is, 60 per cent.—
without prejudice to the requirements of its business, the Commissioners may direct that there shall be disregarded so much of the shortfall as they are satisfied could be avoided without prejudice to those requirements.
Although I am responsible for that version of the drafting I can hardly think of anything fairer or more reasonable to govern this matter, if it is not immodest to say so, than just to take out the "nots" and, if I may make a pun, untie a great many other knots of a different kind for my right hon. Friend the Chancellor.
By my proposal the commissioners concerned have to be satisfied that the company could make the distribution without prejudice to the requirements of its business. Surely that is what my right hon. Friend wants. He does not want a dividend to be forced from a company, although the commissioners are not satisfied that it will prejudice the company. Surely my right hon. Friend wants the commissioners to be satisfied that all will be well with the company after the direction has been made. Why should not the Revenue satisfy the commissioners on this point?
My right hon. Friend the Chancellor has given two reasons—both of them bad, I regret to say—for rejecting this notion of putting the onus of proof on the Revenue. My hon. Friend the Member for Buckingham (Mr. Maxwell), who injects a note of boyish enthusiasm into the argument which is often missing when he is not here, makes the point which is misconceived about the onus of proof. I hope that he will do me the honour of listening to me and then, as he is an open-minded man, he may come to the conclusion that he was wrong and that the purposes which he seeks to fulfil will be fulfilled by my Amendments.
6.45 p.m.
The first objection to the idea of throwing the onus of proof on the Revenue is that, though it was there before, it was there because of the penal nature of the Section and because the penal nature was all that was required by the Revenue to enforce the Section without having the onus of proof thrown on the taxpayer.


We are left to believe by that reasoning that as the Revenue would be completely in the dark about the facts, which, it is said, are
peculiarly within the knowledge of the taxpayer"—
it does not matter whether there is a penal Section; it can act blindly by threatening penal action so that the taxpayer will have to settle.
This is not a convincing argument. Not only is it not convincing in logic; it has no relation to practice. The idea that the Revenue has been condemned to grope blindly and to collect Surtax because the taxpayer was the victim of a penal Section is a complete figment of the Treasury's imagination. It is very reassuring to know that the Treasury has imagination. We always think of it in a more prosaic vein, but this is a most inappropriate time to give vent to our thoughts. That does not seem to me justifiable.
When the courts decided that the onus of proof was on the Revenue, they did so because of the words used and not because of the extent of the powers conferred on the Revenue. If my right hon. Friend does not think that that is the case, I invite him to accept similar words and I will take a chance that the courts will give a similar interpretation to a Clause worded in a similar way in spite of the very different consequences which we both agree will result from a direction being made. Therefore, that argument will not do.
The second argument which is advanced is that these matters are
peculiarly within the knowledge of the taxpayer".
I thought that that argument was demolished, but rather drily, by the right hon. and learned Member for Chertsey (Sir L. Heald). As he rightly says, this rule—

Sir L. Heald: The hon. Gentleman would not want it done wetly, would he?

Mr. Lever: I meant that the argument, presented in a dry and learned manner by the right hon. and learned Member, was appreciated by the legal members of the Committee and that to them his points were irresistible. I am afraid that there may be other hon. Members who

found the argument too terse, although I found it overwhelming. Certainly, my hon. Friend the Member for Buckingham may gain by some extension of or gloss on the argument. There is evidence which makes me so suppose.
On the individual matters of fact which arise in the course of a trial of what is or is not a reasonable distribution, it is right, and normally follows by automatic presumption of law, that the onus of proving facts which the taxpayer is required to prove in order to persuade the commissioners that his dividend is reasonable and which are exclusively and peculiarly within his own knowledge, it is right should be on the taxpayer.
I am sorry to take time on this, but it is a matter of tremendous importance to taxpayers whose minds are greatly exercised about it. Let me take a simple case. If there is £10,000 worth of profit left in the bank after the company has paid its dividend and the onus of proof is on the Revenue, this does not place on the Revenue the onus of proving that every conceivable way in which that £10,000 may be usefully expended for the extension of its business will be denied to the company.
No such onus of proof would rest, or ever has rested, on the Revenue. If the taxpayer wants to assert that £10,000 in cash has been accumulated for a particular purpose known only to him, then, in any case, the onus of proof is upon him and he must prove his assertion, under the present law, to the reasonable satisfaction of the special commissioners. So, in my respectful submission, my right hon. Friend has totally disallowed the taxpayer's right to persist in this obstinate way on the onus of proof by the reason which he has advanced for it.
What he is saying is that the Revenue is in the kind of difficulty which arises under the criminal law, where facts are exclusively and peculiarly within the knowledge of the defendant, and the defendant has to prove those facts if he wants the court to act upon them. That will be the case now so far as these hearings are concerned.
What I want is that the general onus of proof—which in all criminal cases, if one follows this analogy, is on the Crown—should remain where it always has been, on the Inland Revenue. It


will soon be seen that it is very important to make this distinction. Supposing that all the facts are not in dispute. The result of the onus of proof would be on a question of opinion—this is a matter of opinion—whether a distribution is reasonable or whether a company will be prejudiced. It is not a matter of factual knowledge within the knowledge exclusively of the taxpayer. This is a matter of estimation by the special commissioners and the Revenue is in as good a position to argue this matter to the satisfaction of the special commissioners as the taxpayer is.
If I am a taxpayer and I have money in a company and I say, as was said to the right hon. and learned Member for Chertsey by the constituent who wrote to him, that I have kept back £100,000, but that I wanted to keep large sums because my company is in the nature of a banking business, nothing is in dispute here. The only thing which would have been in dispute in that case would arise if the Revenue said, "You do not need this cash." The company might say, "We may need it. We are not pointing to any specific reason, but in our estimation it is desirable and reasonable to keep that cash in the business and it will prejudice the business if it is forced out."
Under the old law, the Revenue would have to prove, to the satisfaction of the commissioners, that no damage or prejudice would result to the company by that cash being forced out. Under the new law, if the onus of proof is thrown upon the taxpayer, it will be for the taxpayer to satisfy the commissioners. If the commissioners are left in a state of real doubt on the matter, they will be obliged, in my opinion, on this new wording to say, "We are sorry. We think that there is some doubt in the matter. It may be that we are injuriously and oppressively injuring this company. We have no wish to do so, but we are obliged by the Section—because the onus of proof is upon the taxpayer and he has not completely removed all substantial doubts—to make the direction." That cannot be right.
It will not do for the Chancellor or any of his representatives to tell us that the Inland Revenue will be in a state of great difficulty if this position over the

onus of proof is not put right. One may seriously wonder how anyone has the cool nerve to advance any such argument to the Committee. One wonders how the poor special commissioners have managed all these years when the onus of proof has been firmly and totally laid upon them. I say that it will not do for the Chancellor to say that the Revenue will be impossibly prejudiced if the onus of proof stays where it always has been.
I am particularly unsympathetic when I remember that this whole Corporation Tax brings to a new height the standard rate of Income Tax where there is a full distribution and that a very high rate of tax results when there is a high rate of distribution. This is defensible and has been defended by my right hon. Friends only on the grounds that companies will not be obliged to pay it out and will be encouraged to retain it. If they are to be encouraged to retain it, any doubts about distribution ought to be resolved in favour of the taxpayer.
In all these circumstances, I beg my right hon. Friends once again to do the image of the Government a power of good by yielding upon this. There is a point where there is misplaced pedantry and misplaced obstinacy. In my opinion, this is it. This is the moment when my right hon. Friends ought to realise that a political decision has to be made here in the interests of the taxpayer. In my opinion, it will not cost the Revenue a brass farthing and will reassure many taxpayers who are at present in a state of apprehension on this matter. I particularly urge this on my right hon. Friends, because if my right hon. Friend does not give way to my request that he should keep the onus of proof where it always has been, there will be a real danger of the taxpayer feeling apprehensive that he will be the subject of oppressive use of this Clause.
If my right hon. Friend gives way and moves the onus back to where it always has been, I will be able to say without any kind of insincerity or reservation that this Clause marks a real and handsome advance towards the protection of the taxpayer in relation to matters of Surtax direction. What a pity it is that this Clause, so splendid in many of is conceptions, should be marred by a blot


which can only be justified by bad arguments, worse logic and misplaced obstinacy.

Mr. J. Grimond: I feel that it would be ungracious if those of us on this side of the Committee who have benefited from the support of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) did not, in return, give him support in his Amendments. I would not attempt either to duplicate the figures which have been provided on these Amendments by a spokesman from the Conservative Front Bench, or to emulate the hon. Member's knowledge of the legal side of these matters. However, I can certainly testify to the anxiety which has been caused to business. I have received many letters from people who are genuinely apprehensive about this change of onus. One man in particular, who admits the abuse which has been made in the past by some private companies and who is, in general, quite favourable to the proposals in this Clause, nevertheless feels that to alter the onus in this way will hamper his business.
I think that this is another example of the Government's tendency to put the suppression of tax avoidance before the encouragement of business enterprise. This has been mentioned before. I do not say that suppression of tax avoidance is not important—of course it is—but I hope that the Government spokesman will deal with some of the points made by the hon. Member for Cheetham. I think that he has demonstrated that it is not necessary to change the onus in this way, to take these steps to stop tax avoidance by close companies. It appears that many legitimate businesses, which are certainly not attempting tax avoidance, regard this as a threat to their expansion and efficiency.
We began this discussion on a proposal to reduce the rate from 60 per cent. to 40 per cent. The hon. Member for Cheetham pointed out that some of the objections to 60 per cent. would be overcome if Amendments were made in the later stages of the Bill. We are in some difficulty here. This may be true, but we are forced at this moment to debate the Bill as it is before us, and it would be wholly out of order to take into account putative amendments to Clauses which we have not yet reached—

Mr. Harold Lever: If the right hon. Member proceeds pedantically in this way, he will do his own argument an injury. The interest charges produce evil results which can be considered separately, but if the interest charges are removed, any argument based upon disallowance of interest will be fallacious. All that will happen is that the right hon. Member will be retrospectively made to look illogical, and even ridiculous, if the Amendments are made.

Mr. Grimond: I do not want to be made to look retrospectively illogical. But the hon. Member for Cheetham looks illogical now. This may be an important, illogical difference between us, and we have had many illogical arguments on this Bill, but it is a difficulty under our present procedures.
I agree with the hon. Member about this. I believe that the Chancellor's Amendments to this part of the Bill are a great improvement and it may be that taken in conjunction with such further concessions as the right hon. Gentleman intends to make, a reduction of from 60 to 40 per cent. may become much less necessary. The Committee should, however, bear in mind the points already made that the top rate of 60 per cent. is not as favourable as the Government have sometimes represented it to be.
7.0 p.m.
I do not know how the Chancellor will ultimately treat interest and other things which are chargeable to these companies. Again, I think it is true that directors' loans, for instance, can in some cases be made a method of tax evasion. There is a real difficulty here.

Mr. Harold Lever: Mr. Harold Lever indicated dissent.

Mr. Grimond: The hon. Member shakes his head. The difficulty with him is that he is so busy in maintaining Cheetham's balance that he is anxious not to associate himself either with too many criticisms of the Government or, indeed, with too many favourable remarks to them. Perhaps I might set the hon. Member's mind at rest by saying that when we come to the further discussions on charges and interest which are chargeable against these companies, I take it that we will have his wholehearted support.

Mr. Harold Lever: More than a shake of the head is necessary. Nobody is suggesting that directors' loans have been used for tax avoidance. What the Bill clearly has in mind is that under the new system of taxation an obvious form of tax avoidable may be directors' loans.

Mr. Grimond: I hardly ever differ from the hon. Member on matters of this kind, but I have a letter from a director who claims to have operated directors' loans as a means of tax avoidance, although he goes on to excuse himself by other features of the tax system.
What the Committee should impress upon the Government is, first, that the change of onus is a serious matter and that we should support the Amendment—

Mr. Maxwell: It just is not possible to avoid tax by a director's loan account. It simply would not be allowed. I wonder, therefore, whether the writer was trying to mislead the right hon. Gentleman.

Mr. Grimond: If he was, he has misled a lot of other people, too.
On the serious question concerning the onus of proof, I hope that the Government will give way. On the point of a reduction of from 60 to 40 per cent. in the tax, this ties up with the general state in which the Clauses are left at the end of the day. All I can say is that if the Committee finds them unsatisfactory when they have all been examined, perhaps we shall have a further opportunity of examining them again on Report with the help of the hon. Member for Manchester, Cheetham (Mr. Harold Lever).

Sir Peter Roberts: If the Government persist in maintaining the onus of proof as they now have it, obviously the Amendment from this side of the Committee to reduce the 60 per cent. level is necessary. I agree entirely with the arguments which have been put forward. I want, however, to ask the Financial Secretary a question. None of us wants to assist tax avoidance, as is shown by the views that have been expressed concerning the onus of proof to deal with people who deliberately try to take advantage of any opportunities. They are very few.
The much larger proportion of people who are trying to run their businesses

want to ascertain the proper proportion that they can get through the special commissioners, whose guidance they accept so that they may put the figures in their accounts. That is the normal way of doing business. All I want to assure myself is that it is the intention of the Government that that sort of procedure which has been used by the special commissioners will continue with the inspectors of taxes.
The problems which I have in mind concern the finances of a close company which wishes to ascertain the level at which it can make a distribution. It is an old Section 21 company. The existing position is that the company's accountant makes inquiries of the special commissioners, shows them the draft accounts, states that he recommends that the board should pay a distribution of £X and asks for guidance. The result is that before the final meeting of the company, the accountant can go back to the directors, tell them that he has had unofficial discussions and say that if they put in £X amount of dividend, he believes that it would be acceptable. All this happens before the annual general meeting of the company and before the accounts are published.
Sometimes, when a company's accountant does not go to the special commissioners, being a Section 21 company it puts a figure in its accounts and pays out its dividend. It may not be until a year later that the Wimbledon office writes to say that the distribution has not been sufficient and that a Surtax direction will be issued. Once that happens, the machinery operates right the way through and there can be an appeal. That is what one wants to avoid. The whole object of running the system as we now have it is that it is possible to go to the special commissioners, get guidance in advance, pay the dividend and more or less know that there will not be a Surtax direction thereafter.
If I am right so far, what will happen under the new procedure? Will it be that an accountant goes to the inspector of taxes and says, "The end of the company's year is in two months time. We want to have a board meeting in a month's time to finalise the accounts"? My experience is that when one goes to the local inspector of taxes with one's problems, a letter arrives to say that they


will be looked at and a month later one telephones to discover what is happening. There is almost automatic delay on the part of the overworked inspectors of taxes.
The speedy procedure of Wimbledon may well slow itself down when it is operated by inspectors of taxes, so that the time when the accounts for the year have to be finalised and published passes before they can be completed. In such a case, the board of the company would have no informal advice and must insert its own figure. Once it puts in its figure and it is published, the procedure which we have been talking about starts to operate. This might not happen until six months later There might be an appeal and eventually, if the matter goes wrong, complications will arise of going to all the various shareholders, some of whom may not be the five participators. There might be hundreds of other shareholders. All the tax problems of those individual shareholders must be gone through by the inspector of taxes to see whether a charge should be made. That is what I want to avoid. Obviously, no company wants to do it, nor, I believe, do the inspectors of taxes.
We know that under the proposed arrangements there must be a period of a month within which an answer must be given and also a two-month period. As I understand it, that does not apply to the unofficial approaches which accountants at present make to the special commissioners by means of which the board of a company is given the opportunity of putting a figure in its published accounts.
This is the crux of my question, because this is what will happen in 99 per cent. of cases. Will the Government give instructions to the inspectors of taxes that if an unofficial approach is made by an accountant on behalf of a company, they will give guidance as has been done in the past? Will they give guidance in time for it to be put into the published accounts? If this is not done, I believe that the complications and the extra work which will be forced upon inspectors of taxes will be far greater than the Financial Secretary imagines.
One has only to consider the case of one of the bigger companies, some of which have a large number of share-

holders. It may be that only certain of them are Surtax payers and that certain of them are recipients of various assets. As I understand, the Inland Revenue will have to look at every shareholder's holding to assess whether or not it is a close company. The problems involved will be enormous.
The question I ask is, therefore, a practical one and the Government must have thought about it and understood it. Is the right hon. Gentleman able to say that the Government will give instructions to the inspector of taxes, as to the Wimbledon offices, and can we be assured that action will be taken to assess the amount so that an answer can be obtained before the finalising of the accounts? I appreciate that such an answer might be quite unofficial, something like, "We have looked at the accounts and it appears that the figure of such and such is reasonable". If we can get a practical assurance of that type it will be helpful, otherwise the Government will create a most awful situation.
I do not believe that the average board wishes to put in its accounts a figure which will be challenged—that is, unless it is trying to be a tax avoider. I am not arguing about that. I am talking of the reasonable people who, I fear, will be penalised because of this provision. I hope that the right hon. Gentleman will give an assurance that instructions will be given to inspectors to give priority to this matter, since there are times when at certain offices one cannot get a reply for some months. I hope that we can be given some guidance on this important matter.

Mr. Diamond: It might be convenient if I now reply to the comments which have been made and, in so doing, I hope to remove some of the anxieties which exist.
The hon. Member for Nottingham, South (Mr. William Clark) raised the question of the 40 per cent. or 60 per cent. As has been demonstrated by hon. Members on both sides of the Committee, in the normal case—and we will come to the abnormality shortly—the effect of the proposal in the Bill is that what has been practiced hitherto will now become the ceiling. In other words, we go from practice in the normal case to ceiling. I do not know how much more generous


the Committee would want the Revenue to be, bearing in mind the Revenue's responsibility for seeing that everybody pays his fair share of taxation.
In short, a vast number of cases will be removed and in all the normal cases one might criticise the Revenue for going too far under the previous legislation, but certainly not for not going far enough. Therefore, I could not entertain the suggestion that there should be a ceiling which is well below the normal level of distribution in the straightforward case.
The hon. Member for Nottingham, South—who, I regret to see, is not in his place, but I am sure that he will acquit me of any discourtesy in replying in his absence—did what he has done on other occasions, and introduced the abnormality. As my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) wisely said, this does not help the argument. To answer the hon. Member for Nottingham, South, if he had in mind the kind of abnormality where a director was so running a company that there was being returned to him in the apparent form of interest what in fact was a dividend, then we immediately see that the tax includes the tax on the dividend. What is in the hon. Gentleman's example interest is, in fact, dividend—in effect, a return on the capital.
However, one does not get the matter much further by illustrating the exceptional case. Therefore, I repeat that the Government have gone very far in removing the whole of the cases which are comparable under the new tax system with the average case at present and which, after argument, is treated as being exempt from a Surtax direction.
7.15 p.m.
I come to the question of general guidance which the hon. Member for Sheffield, Heeley (Sir P. Roberts) raised. I am grateful to him for participating in this discussion, because he always speaks on the basis of a practical businessman running companies and the difficulties which arise. They are exactly the difficulties we want to remove. The hon. Gentleman's attitude is exactly the one we want to encourage. We want businessmen to know where they stand, completely free of uncertainty. The hon. Gentleman was talking about the straightforward man, just as I am. He was not speaking about the tax dodger, although,

unfortunately, there are quite a few tax dodgers, against whom we must act so that those who are not tax dodgers are not called upon to pay an excessive share.
The hon. Member for Heeley asked if there could be general guidance in advance of finalisation. The answer is, "Yes". We will certainly see that, as far as possible, general guidance is given. This cannot be taken—and the hon. Gentleman did not ask for it to be taken—in the form of a legal clearance certificate, but there is general helpful guidance and that is what we want to give.
In a great variety of companies today a dividend is declared, the matter goes before the Surtax commissioners for discussion and, as a result of that discussion, an additional dividend relating to the period in question is agreed. This is generally how the matter is settled; by an additional dividend bringing up the level of the earlier dividend which was, admittedly and deliberately, too low to allow room for an additional dividend. We would not wish, in practice, to put any bar to the smooth running of straightforward businesses and boards of directors and their having as clear an indication as possible, with the information available at that time to the board and the inspector. I assure the hon. Gentleman that I will see to it that everything possible is done in terms of administration, to achieve that result.

Mr. Barber: Would the right hon. Gentleman give a further assurance, flowing from what my hon. Friend the Member for Sheffield, Heeley (Sir P. Roberts) said? Is he able, in view of the increased burden that is likely to be imposed on the tax inspectorate, to give an assurance that informal guidance of the kind my hon. Friend referred to will be forthcoming as quickly as it has been in the past from the special commissioners?

Mr. Diamond: That was implicit in the assurance for which the, hon. Member for Heeley asked. He was anxious that this information should be available between the time of preparing draft accounts and the publishing of them, which may be a matter of up to six months. I therefore repeat that it was in my mind in saying what I said to the hon. Member for Heeley that time was an essential consideration.
We are, I am afraid, left with the question of the onus of proof. I will take the Committee, step by step, through what will now happen. There will be the preparation of the accounts. The accounts will be submitted to the inspector of taxes in the ordinary way and there will be discussions with the inspector, verbally or by correspondence, as to whether the proposed dividend is adequate. Representations will be made by, or on behalf of, the taxpayer demonstrating that it is as much as could be afforded.
Or it may be that the alternative tactic is adopted, which is regularly adopted, of saying, "I recognise that this is a modest dividend to start with and I recommend an additional dividend to £X". The inspector perhaps then says that it should be a figure of £Xx, a discussion takes place and agreement is reached. If agreement is not reached the assessment is raised and the taxpayer, if he does not want to pay that assessment, goes to appeal.
Then the facts must be established. But he must establish the facts, because the facts are within his own knowledge. It is not possible for the inspector of taxes to say what the facts are; what the future intentions of the businessman are with regard to developing his business. It is not possible for anyone other than the businessman himself to say, "I could not distribute more because I needed the balance for these perfectly good reasons and needs of the business".
Therefore, it is inevitable, if I may say so, in common sense and not just because of the law—and on that I will give way immediately to my hon. Friend—in a general principle, because we are dealing purely and exclusively with the limited problem of proving this particular piece of factual evidence, namely, that the money is needed for a particular kind of expansion, and that the expansion is afoot or in contemplation—

Mr. Harold Lever: Since it is inevitable that this onus should be thrown on the taxpayer, thereby implying that unless it is thrown on the taxpayer the Revenue simply could not prove its case, will my right hon. Friend tell me how the Inland Revenue operated in this

parlous position where the inevitability of the onus being thrown on the taxpayer was not recognised in all the years past?

Mr. Diamond: The answer to that is (a) what I have previously said, and (b) what my hon. Friend has also previously said: the threat of the penal sanction of declaring 100 per cent. of the undistributed profits.

Mr. Harold Lever: My right hon. Friend has not understood my question. It is not what happened before in cases that did not come before the special commissioners—where the threat worked—butsince my right hon. Friend thinks it impossible for the Revenue to prove its case if the onus is put upon it, what happened where the question did come for hearing before the special commissioners? The Revenue, faced with this impossible task, presumably lost every single case it brought, and if it presumably lost every single case it brought, on this assumption no one would dream of settling a case with the Inland Revenue because they would know that all they had to do was to lodge an appeal, and that it was an impossibility for the Revenue to discharge this onus.

Mr. Diamond: I do not think that my hon. Friend is applying his mind to the different procedures that exist at present, and are proposed in the future. I gather that in relation to the future procedures he is now satisfied that in order for the appellant, as he would be, against an assessment raised by the Revenue, to prove that the assessment was excessive in terms of distribution, it was necessary for the appellant to produce the information which only he had. I therefore gather that my hon. Friend is satisfied there.
In the past, the procedure has been different. As my hon. Friend realises, there has been a direction by the Surtax commissioners who, by using the implied—not the explicit, but the implied—threat of 100 per cent. distribution, have been able to extract from the taxpayer the whole of the relevant information, because it was in the taxpayer's interest to produce that information—

Mr. Harold Lever: I do not want to keep breaking in on my right hon. Friend—

Mr. Diamond: I know that my hon. Friend does not, and I do not want to keep giving way either, so we are at one, as we always are—

Mr. Harold Lever: I am entitled to make my point.

Mr. Diamond: My hon. Friend is fully entitled to make his point. I did not know that he felt that he was fully entitled to intervene whenever and as often as he felt so disposed.

Mr. Harold Lever: This is the ordinary courtesy of Committee debate.
My right hon. Friend has so far persisted in misunderstanding the point I have made. Sooner or later he must answer it—and not the point I am not making—and I must ask him to do so. His case is that before the special commissioners the Revenue, if my Amendment is accepted, will not be able to discharge the onus I would throw upon it. What I have submitted to him is that that is exactly and precisely the onus at present upon the Inland Revenue under the old system.
So any taxpayer who, under the old system, came before the special commissioners, was not obliged to produce any documents under any threat of 100 per cent. or any other distribution. He would simply say, "The onus of proof is on the Inland Revenue. I will not produce any documents—you must discharge the onus." If my right hon. Friend is right, the Revenue cannot discharge that onus because the facts are within the knowledge of the taxpayer. In those circumstances, how can that be right? All I urge my right hon. Friend to do is to recognise that if he accepts my Amendment, the Revenue will be in precisely the same position as it is under the existing legislation when such a matter comes before the special commissioners.

Mr. Diamond: I do understand, as far as I am capable of understanding, what my hon. Friend says. I have understood it all the way through, because he makes his point with clarity and persuasiveness. There is a limit to my capacity to comprehend, and it may be that that limit has been reached. All I say to my hon. Friend, and I hope that he will not take this amiss—because he took an earlier intervention amiss—is that I understand,

I think, what he is saying. I think that he is mistaken. I am advised that he is mistaken. I am not relying on my legal knowledge—I am advised by those who are there to advise Her Majesty's Government on these matters that my hon. Friend is mistaken, but—

Mr. Barber: Mr. Barber rose—

Mr. Diamond: Do let me finish; I am still in the middle of a sentence if it helps the right hon. Gentleman—but inasmuch as it is possible that notwithstanding my desire and willingness to understand my hon. Friend's point, and inasmuch as we are completely at one in the desire to remove misapprehension, if there is a misapprehension, I will gladly—and this is what I wanted to say, and why I did not want to delay my hon. Friend—once more consult those who are there to advise us, because I do not wish to be guilty of the charges of blind obstinacy which were thrown at me.
I will see whether there is any doubt as to the view previously held, and whether there is any real need to amend the legislation as it is at present proposed. If there is, I will unhesitatingly come back on Report with whatever Amendments might be appropriate. Nevertheless, I repeat that this has been very carefully considered. It is not a question of doing anything inadvertently, but part of the deliberate machine of making the tax collection work smoothly and fairly, and of eliminating all possible trouble for the straightforward business man and taxpayer.
I do not think that I have been wrongly advised, but I tell my hon. Friend that I will look at the point once more, take further guidance on it and, if it is necessary, bring forward an Amendment on Report. But I must repeat that, at the moment, I am advised that the legislation as it stands serves the purpose it was intended to serve.

Mr. Barber: We have spent a very considerable amount of time on the question of onus of proof, and listening to the difference of view of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) and the Chief Secretary. I do not share the view of the hon. Member, for a particular reason, but this dispute has taken a very considerable amount of our time. My experience has


been that when the Committee has discussed these sort of matters at this stage of the Finance Bill, it has sometimes helped if one of the Law Officers has been available to deal with such difficult questions as onus of proof.
I do not suggest for a moment that we should now delay our proceedings merely because a Law Officer is not here, but later, when we come to the Question, "That the Clause stand part of the Bill", it might be convenient to the Committee if one of the Law Officers were available to deal with the matter, when it would be cleared up once and for all.
As I understand it from the Chief Secretary, if the point is not cleared up now we shall want to return to it on Report. I thought that I was perfectly clear on the position but, having listened to the Chief Secretary, I now wonder whether I was right in taking a view different from that of the hon. Member for Cheetham.

7.30 p.m.

Mr. W. R. van Straubenzee: My right hon. Friend the Member for Altrincham and Sale (Mr. Barber) has reminded us of the inordinate amount of time we have necessarily taken, largely in discussion from the benches opposite, on this matter. I think it would be useful to move away from the very important, but limited, point which been discussed so much because these Amendments which we are discussing together deal with much wider matters as well as with the important question of the onus of proof.
The first matter to which I draw the attention of the Committee arises on Amendment No. 707. What I think is fascinating to inquire into is why this Amendment has been proposed. It is very important first to make quite clear that the impression given in some sections of the technical Press that Amendment No. 707 writes a very substantial concession into the Bill and that in some way the tax applied to close companies has been very substantially recast and quite new provisions are put into the Bill, is not an accurate impression. I can derive authority for that statement from the Chief Secretary himself, who not only explained this briefly—I make no complaint about the brevity—in moving the

Amendment, but at a much earlier stage was the person more than anyone else who made the point that the same provisions were contained in Clause 10.
What interests me is why this has been moved. I think that the reason is in the background of the presentation of this tax. The Chief Secretary said at an earlier stage of our discussions on this Amendment that very widespread anxiety had been caused to many people outside the House by this proposal. That was the masterly understatement of the year. Those of us who are lucky enough to have contact with one or other aspect of the business world have hardly known a time at which so much time has been taken up in innumerable large and small board rooms trying to make up their minds about the effect of the close company proposals on individual companies. Quite an inordinate amount of utterly wasted time has been taken up by individual companies and their innumerable advisers and often it has taken them from other work at a time when we need every effort in every individual company to work on something of a constructive nature.
If it was necessary to extricate these provisions and almost entirely reproduce them from an obscure Schedule to the body of the Bill it was because by the inept presentation of these provisions the Government have no one but themselves to blame for the resultant confusion in the business world. At least we can say that there is merit in bringing them out into the open in this way, but there would have been a deal more merit if they had been better presented in the first place. I repeat that it is most important to make the point that Amendment No. 707 moved by the Chief Secretary does not in fact recast the tax substantially from the position it held originally when the Bill was presented.
There has not been a major concession on this matter made by the Chancellor. Those who advise companies and run companies affected would be well advised to look again closely at this point.

Mr. Diamond: The hon. Member is of course right in saying that these provisions were, as he suggested, tucked away in a Schedule, but he is not right in saying that the position was not made clear. The White Paper, Command 2646—I


refer not to the more detailed part but the summary at the beginning, which surely is the minimum that any interested party would read—states at the top of the page 6, under the heading:
Closely-controlled companies
… (ii) Shortfall in distributions.
A closely-controlled company which makes inadequate distributions will be charged Income Tax on the shortfall, except to the extent that it can show that retention of profits is necessary or advisable for the maintenance and development of its business …
Right in the opening paragraph that is made absolutely clear.

Mr. van Straubenzee: Subsequently, when individual boards and advisers sought to give substance to that point—and, what was very much more important, those who write about these matters—found it extremely difficult to look at the different Clauses and Schedules of the Bill as one constructive whole. The result—this is indisputable, because the Chief Secretary himself says so—was very widespread confusion about the corporate effect of these provisions.

Mr. Diamond: Why?

Mr. van Straubenzee: The Chief Secretary ask why. Is he asserting that here there was a malicious attempt by the Press to denigrate these proposals? In the kind of technical Press of which I am thinking in this instance I do not think that considerations of that sort were generally applied.

Mr. William Clark: A conspiracy?

Mr. van Straubenzee: As my hon. Friend says, a conspiracy.
We have spent much time on these Amendments, important as they are, and we have much more to go through. It seems strange at a time when it is generally agreed by many reports of one kind and another that one of the difficulties of what will become close companies will be the raising of necessary money for development that the average dividend covered by quoted companies should be thought sufficient for a company which by definition cannot go to the market for its finance. I think it will be found that if, as I suspect, the 60 per cent. does become the norm at least in the first instance—I must honestly say to the Chief Secretary that nothing in

his fervour so far has ruled that thought from my mind—the provisions will prove in a large number of cases to be quite insufficient for an expanding business.
Many of those in this Committee—there has been one example among hon. Members opposite—in favour of these proposals are frankly people who have got into the "club" already themselves and are not sufficiently thoughtful of those thrusting, growing small companies upon which in so many technical fields our prosperity depends. It may be that in future years we shall be able to look back upon the Chief Secretary's words and say that he was proved entirely right and that our anxieties and fears were entirely unjustified, but at present that is not the view which has found general acceptance in very wide business circles.
Therefore, it seems that a very strongly argued case can be made for the Amendment to the proposed Amendment, proposed by my hon. Friend the Member for Nottingham, South (Mr. William Clark), which in essence would have the effect of ensuring that if one has to have a designation of this sort approximately at least a third of the profit would be available for plough back. This, I should have thought, was far more in line with the kind of procedures which have been applied up to now. [HON. MEMBERS: "No."] This must be a matter for judgment. If confess that I have found it very difficult to take careful advice on this point and to some extent I draw on my own modest experience, but, in consulting a number of people who deal very extensively with these matters, I find that they dispute fairly strongly some of the figures given about the working of the close companies system as it is at present. For these reasons, on the assumption that there is to be this figure, a strong case has been established for the Amendment to the Amendment, a case on which I very much hope that the Committee will have an opportunity of expressing itself in due time.

Mr. Barnett: I believe that the way in which the case was presented by the hon. Member for Wokingham (Mr. van Straubenzee) is one of the reasons why businessmen have been confused. Much of what the hon. Gentleman said will be picked out for headlines and will lead


to confusion in the minds of businessmen. I frankly admit to being prejudiced in favour of the ordinary, average, decent taxpayer. I would want to see him helped in every possible way. I believe that, if politics were to be separated from the issue, both sides of the Committee would want to see a fair and reasonable system applied to close companies in particular.
I want to take up, first, the arguments presented by the hon. Member for Nottingham, South (Mr. William Clark) on the question whether the distribution should be 60 per cent. or 40 per cent. I believe that on further examination the hon. Gentleman would agree that the case he presented was without foundation. He first assumed a Corporation Tax of 40 per cent., whereas, if an equal comparison were made with the existing system, a 35 per cent. rate should be taken. Then he disallowed from his £100 example £20. Again, this is a supposition which cannot carry any weight. In logic, the case must be argued as it exists, not as it might exist in some extreme example. The hon. Gentleman went on to say that this will affect growing companies. He gave some examples of the amounts of distribution to directors. Perhaps we shall have an opportunity on Report to look again at directors' remuneration, for I certainly am not satisfied with the situation as it still exists.
But it would be very rare that a director in a close company would want to take £11,000. In by far the largest number of cases of very small companies, about which hon. Members have been speaking and in which there are perhaps just a husband and his wife, the directors would not want to take more than £5,000 between the two. They would want to keep inside the Surtax limit and plough the rest back. One of the confusions in the minds of many hon. Members is the difference between retention and plough back.
The hon. Member for Nottingham, South, took as his example the situation, in the case of his £100, where under the existing system 60 per cent., which is the maximum, would have to be distributed. He then took the 40 per cent. in the other case as it exists on average today. There is no reason to suppose

that companies will not under the new close company situation also be able to distribute as little as 40 per cent.—indeed much less. Most close companies which are ploughing back their profits, as opposed to retaining them merely to avoid Surtax, will be able to pay no dividend at all, not even 1 per cent. It is completely misleading to cite as an example the existing situation of a 40 per cent. company and the new situation which might apply of a maximum of 60 per cent. This misinterprets the situation which will apply in practice.
In practice, the Surtax commissioners rarely give the 100 per cent. direction. Very rarely is 100 per cent. of profits distributed, because no adviser would allow a company to find itself in that position. Equally, no adviser would allow his company under the new situation to pay the maximum of 60 per cent. He would be able to negotiate either with the Surtax commissioners or, as is now the case, with the inspector.

7.45 p.m.

Mr. Harold Lever: Is it as rare as my hon. Friend supposes that 100 per cent. was exacted under the old legislation? Surely under the old legislation 100 per cent. was automatically exacted in cases of liquidation—in the last year before liquidation and in several other such contingencies. It was not as rare as is alleged that 100 per cent. was exacted.

Mr. Barnett: In all cases of liquidation, naturally. Just what percentage there are of cases where companies are in liquidation is a question which my hon. Friend would perhaps want to ask my right hon. Friend the Chief Secretary.
I want now to deal with the question whether this matter should be dealt with by inspectors or by the Surtax commissioners. This is perhaps a limited point, but in practice it is important. The hon. Member for Sheffield, Heeley (Sir P. Roberts) made the valid point that inspectors are busy people and that there might be unnecessary and unreasonable delay. I want here to pay credit to both inspectors of taxes and to the commissioners. I have dealt with both. Both types of people are very reasonable men and women, because there are women inspectors of taxes, too. Speaking as a provincial Member—there are more provincial Members than there are London


—I would far rather deal with my local inspector, if only as a matter of convenience. In negotiation, as opposed to the simple straightforward case, it is necessary to go to Wimbledon. The accountant, a director and counsel have to go. As counsel cannot be taken without a solicitor, at least four people have to go all the way down to Wimbledon.

Sir D. Glover: The hon. Gentleman and the hon. Member for Manchester, Cheetham (Mr. Harold Lever) and I could get together and form a cabal on our own. I have disagreed with hardly anything that the two hon. Members have said. Does he not realise that his statement that four people must go all the way to Wimbledon implies that the case must be sufficiently complicated that it is what I would call a High Court case rather than a magistrates' court case? By saying that a director, the accountant, a solicitor and counsel are needed, he is in fact saying that the case being dealt with is one which should be put before an expert and not before the ordinary run of tax inspector in a district.

Mr. Barnett: With respect, I do not know that I would be at all happy in a cabal with the hon. Gentleman. I am not sure that he will agree with everything that I propose to say hereafter. I will come later to the question whether in difficult cases it would be better to deal with somebody with specialised knowledge. At present, even in the simple cases, the accounts must be sent down to Wimbledon to get clearance and agreement. The hon. Gentleman's mention of specialised knowledge overstates the case. Exactly what is meant by "specialised knowledge"? A set of accounts is studied and the decision must be taken whether 60 per cent. or 40 per cent., or 30 per cent. or 20 per cent., should be distributed. It is true that the Surtax commissioners deal with this type of thing and nothing else, but it is not accurate to suggest that it is necessary to have some specialised knowledge, other than being able to understand a set of accounts, to decide whether there should be 40 per cent. or 30 per cent., or 20 per cent. distribution. It is difficult to believe that the average inspector of taxes would not easily be able to decide with reasonable fairness, in conjunction with the accoun-

tant involved, what was a reasonable distribution. I feel that it is to overstate the case to suggest that it would be better to have some body with specialised knowledge. However, I have known cases myself where there have been lengthy delays in getting replies from inspectors. After all, they are very busy people. I have seen their desks even more overloaded than my own and it sometimes takes them a long time to find a particular file, let alone to reply to correspondence.
At the moment there is a visiting inspector who goes around from one district to another in a sort of supervisory way, and it might be possible to have touring inspectors going from district to district, if necessary dealing simply with this point. But generally, with the cooperation of the inspectors and with the sort of recommendations which I understand my right hon. Friend suggests that he would give to the inspectors, I do not believe it would be very difficult to get the sort of co-operation needed with inspectors of taxes.
To deal shortly with the question of onus of proof, in practice most cases will be settled as between an accountant and the inspector. Therefore, any further disagreement will apply only in a very limited number of cases. Speaking for myself, as I said at the outset, I am prejudiced in favour of the taxpayer. But the case is overstated if it is said that the taxpayer is worried about the situation as it exists at present. The taxpayer does not understand whether the onus of proof works this way or that way. Under the existing system most taxpayers say to their accountant, "What is my tax liability?".

Mr. Patrick Jenkin: Would the hon. Gentleman not agree that what might have worried a large number of taxpayers is the sentence in the White Paper referred to by the Chief Secretary at page 24:
The required standard is normally the whole of the distributable investment income for the period, plus 60 per cent. of the estate or trading income for the period"?
Does the hon. Gentleman not think that that is what worries the taxpayer?

Mr. Barnett: I suggest that there are very few taxpayers who have read it. [Laughter.] That is my opinion.

Mr. Kenneth Lewis: Would not the hon. Gentleman accept that many people who run small businesses have had clearly indicated to them by their accountants that they are worried? As a professional accountant, the hon. Member ought to understand that the businessman accepts the accountant's view of his accounts.

Mr. Barnett: I was saying that it is unlikely that the taxpayer had read that particular sentence, and I will stick by that. If it is suggested that the average taxpayer has read the 226 pages of the Finance Bill or of any other Finance Act I would not agree. I am sure that taxpayers read very little of these Measures. The question which taxpayers ask is, "What is my tax liability?" and they do not bother with the niceties of phraseology in Bills or White Papers.

Mr. William Clark: Would the hon. Gentleman say "Yes" or "No" to the question whether accountants are worried about this quotation from page 24 of the White Paper? I think he will agree that it is the accountant who advises the client. Whilst the taxpayer may not have read the 226 pages of the Bill, the accountant will tell his client "I think"—or "I do not think"—"you will be penalised under this particular provision."

Mr. Diamond: As we have had a selected extract—

Mr. Harold Lever: And misleading.

Mr. Diamond: —a misleading extract, as my hon. Friend has said, from a particular paragraph in the White Paper, may I ask the hon. Gentleman to read an earlier paragraph which states:
… and the shortfall is not justified by the needs for the maintenance and development of the business.

Mr. Barnett: I thank my right hon. Friend. If an accountant, having read and understood the relevant provisions relating to close companies, were to suggest to his client that the close company legislation as such will adversely affect a growing company ploughing back its profits, I would suggest that the accountant was misleading his client, because this is not the case.
On the question of onus of proof, this is a very limited point, and if it gives

the slightest satisfaction and makes the taxpayer feel a little better, I should like my right hon. Friend to give way on this. It will cost the Revenue nothing. It will help to dispel some of the confusion thta exists and, therefore, I hope my right hon. Friend will look at this again. Even if he feels that it is still not very important and that the point is covered anyway, all the more reason to bend over backwards to dispel some of the confusion, however mistaken, which exists.
There has been so much confusion on the effect on close companies that I want to make it clear, I would not be a party to any legislation which hurt this type of company. In the larger companies the rate of growth that one can expect is comparatively small, but the rate of growth that one can expect in a close company can be explosive. I therefore think it cannot be stressed strongly enough that close companies ploughing back their profits have a great deal to gain from this Bill.

Sir Frederick Bennett: Many of the remarks of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) were so helpful, illuminating and fair that it seems churlish to make any criticisms at all.
However, before coming to the main theme of my remarks, I must say that he did not do justice to himself in the suggestion that if the Chancellor did not give way on the question of individual inspectors tackling these matters instead of the special commissioners, he would like to give the Committee a little consolation because as time went on the former would do better and gain the experience which they have not had up till now.
This is a little odd, because it suggests that hardship and unfairness to the taxpayer is all right so long as it lessens over the years. It follows that this would clear up during the years ahead—

Mr. Harold Lever: I never count hardship by numbers or by point of time. What I was suggesting as a consolation to those of us who lean in the direction of the hon. Member is that the special commissioners get their expertise very quickly.

Sir F. Bennett: I thought the hon. Gentleman accepted the fact that this is


built up over a period of 40 years. In fact, expertise has been built up. Anyway, if the hon. Gentleman says that he is leaning in our direction I should like him to lean a little bit more heavily than he has done up to now.
The main reason why we are taking so long over this subject is, without any intention of discourtesy to the Chief Secretary, that he did not reply adequately to the various points made by my hon. Friend the Member for Nottingham, South (Mr. William Clark). He did only two things during his remarks which have led those of us who had not wanted to intervene to come in at this stage of the debate to try to obtain further clarification.
8.0 p.m.
First of all, he said about my hon. Friend's remarks that "as usual"—and I thought that that was a little discourteous—he relied on abnormalities to justify his case, but he did not say a word about what was abnormal and he did not refute or deal with any of the figures which my hon. Friend gave. Secondly, he dealt with the onus of proof in such a way that everybody in the Committee is now more confused than they were before he spoke. In the absence of Front Bench counter-arguments to my hon. Friend, all I have to deal with is the intervention by file hon. Member for Cheetham and the intervention by the hon. Member for Buckingham (Mr. Maxwell), who I am sorry to notice is not now in his place.
The hon. Member for Cheetham tried to say that the fears expressed by my hon. Friend the Member for Nottingham, South and the figures which he gave to illustrate those fears would be real only if at a later stage the disallowance charges were put in such a way that those fears would be realised. We have come to a point when we are having debates on the assumption that the Chancellor will do something later which at present he has shown no sign of doing. If this is to be the procedure, we can have no useful discussion on any Clause, because the reply to our arguments will always be that something better will be done later. We must have proof that the figures which my hon. Friend gave are unreal before we are told by the Government that we should not worry about them. To say that even if the figures are valid now they will not be valid by the time proceedings on

the Bill are completed makes nonsense of debate.
The hon. Member for Buckingham did not rely on abnormality or the later good intentions of the Chancellor. He simply talked about how many people would be affected. He said that it would be a small number and therefore we should not worry about them. To say that is grossly unethical. It would be a most unfortunate tendency in this Committee and in the House if it were to be said of a Finance Bill that it does not matter what it does because only a limited number of people would be hurt by it. This is in direct contradiction of my experience in the many years that I have spent in the House of Commons during which time I have heard one Socialist Member after another dealing with any proposed reduction in direct taxation by pointing to the not only abnormal and unusual but wholly mythical bachelor on £100,000 a year and pointing out what would be done for him.
Apart from the detailed figures which my hon. Friend the Member for Nottingham, South gave, the theme behind his speech was the Government's attitude towards close companies. As far as I can understand, the Government's attitude at the moment, with such reservations of alterations as we may be able to extract in Committee, is that generally such companies should distribute as much as possible of their own profits.

Mr. Diamond: Mr. Diamond indicated dissent.

Sir F. Bennett: If that is not so, I do not know what we are arguing about. Everybody in the country has noticed the serious difference between the Government's attitude towards close companies and their attitude towards large companies. The close companies must distribute as much as possible. The big companies must reserve as much as possible, and we have a situation in which these two things at one stage or another become wholly conflicting.
The simplest possible example can be gathered if one takes the definition of a close company as one in which 51 per cent. of the holding is in the hands of five separate people. Just one more shareholder, putting the control of the company in the hands of six wholly separate people, immediately stops the company


being a close company and the Government say, "You must stop distributing profits and keep back as much as possible". Is it sensible to develop these two things, one with the other, and to say that on the one hand a company of just a certain size must behave in one way and another company of just a certain other size must behave in another way?
This leads one to the inevitable conclusion that the Government, although wanting close companies to develop into big companies, as they have said, and to form a much wider share ownership and have expansion take place, propose at the same time to take steps precisely to prevent that process coming about. I hope that at some stage a further explanation will be given of the incompatibility of this attitude, otherwise I warn the Government that there will be a number of contributions from this side of the Committee to this same effect.

Mr. Patrick Jenkin: I propose to be brief because we have had a very long discussion on this Clause. I would draw the Chief Secretary's attention to the passage on page 24 of the White Paper dealing with the Clause. I will not read it but I respectfully suggest that the quotation which I put in an intervention to his hon. Friend the Member for Heywood and Royton (Mr. Barnett) was not as selective as the Chief Secretary suggested. If one reads the first, second and half of the third paragraph on that page the combined effect is perhaps a good deal more stringent than the explanation which the Chief Secretary gave earlier today. If that had come first and those paragraphs had come later perhaps the great anxiety which has been aroused might have been much less.
In opposing the Amendment to reduce the 60 per cent. to 40 per cent., the Chief Secretary argued that what was being proposed by the Bill was to turn the present practice into a new proceeding. The whole of his argument was based on that, but I question whether this is so. As my hon. Friend the Member for Wokingham (Mr. van Straubenzee) said, it is difficult to collect impressions from accountants, lawyers and so on of what is the normal requirement of the special commissioners now, but the information which I have been able to acquire from

different sources is that the figures are of an order to allow the retention of about one-third of the gross profit.
It may well be more or may be less, but in an ordinary case it appears that about one-third may be retained. Compared with 60 per cent. distribution, when Corporation Tax is 40 per cent. the amount retained is not one-third but just under one-quarter, or 24 per cent., and when Corporation Tax is only 35 per cent. that takes retention up to 26 per cent.—again substantially below the present practice. The right answer is that it ought to be considerably higher than the present practice because, as my hon. Friend the Member for Torquay (Sir F. Bennett) said, there is this fatal and fundamental conflict between the treatment of the small companies and the treatment of the large companies. The large companies are being encouraged to retain when they are the ones who should be forced to go to the market and justify their investment, whereas the small companies ought to retain. This provision in the Bill is the wrong way round. If the rate of distribution is reduced to 40 per cent., as proposed in the Amendment, then, with Corporation Tax at 40 per cent., the distribution becomes 24 per cent., allowing a retention of 36 per cent.; and with Corporation Tax at 35 per cent. the retention rises to 39 per cent. This seems a reasonable proposal in the context of the whole Bill, which is designed to encourage companies to plough back.
A word now about Amendment No. 629, which relates to the distinction drawn in the case of a trading company between investment income and trading income. This Amendment was intended to equate the two for the purposes of treatment under the Bill. The Committee will know that trading income is, broadly, income which for an individual would be earned income, and investment income is income which would not be earned income. The Chief Secretary, in moving his Amendment, made quite clear that it was still the Goverment's intention to adhere to what has always been the practice, that investment income must be regarded as distributable up to 100 per cent., and trading income was to be subject to the test of the needs of the business. It seems to me that for a trading company this is not a sound procedure.
It may well be that a trading company holds investments and derives income from them with a view to future expansion. It is sometimes necessary to collect investments over a period of years and to add to them in order finally to be in a position to indulge in, say, a major expansion which can, possibly, lead to a private company going public. I seriously question whether, in the context of the Corporation Tax and the new arrangements here, it is not right for the Revenue, in the case of a trading company, to be entitled to say that the company is not held to distribute the whole of its investment income but it can look at its investment income in relation to future requirements for expansion and development of the business. Perhaps it is right that the power to direct that the whole be distributed should be retained, but that the Revenue should be entitled to allow a company, if necessary, to retain the whole of its trading and investment income.
I hope that I have understood aright the point in the Government Amendment and that I am not tilting at windmills or pushing at an open door. As I understand it, the way that it has been drafted still requires the automatic direction as regards the whole of a trading company's investment income. It seems to me that that is probably not justified, and I hope that the Government will deal with the point.

Mr. Harold Lever: I wish merely to say that, although the only time I have ever had any conflict with my right hon. Friend the Chief Secretary is in this Chamber during our debates, as he has gone so far as to say that he will consider the points which I have raised, I wish to ask leave to withdraw the Amendment in my name.

The Temporary Chairman (Mr. H. Hynd): That Amendment has not been moved, so it is not necessary to withdraw it.

8.15 p.m.

Mr. Barber: We still have to consider the general purport of the Clause on the Question, "That the Clause stand part of the Bill." so I shall be brief in summing up the Opposition's case on this series of Amendments.
I agree with my hon. Friend the Member for Wokingham (Mr. van Straubenzee) that the Chancellor's Amendment, about which he sought to make so much when his Amendments first appeared on the Notice Paper, makes no difference of substance whatever. In the first place, the figure of 60 per cent. appears in the original Clause and it appears also in the Amendment. There is no change. The criterion to be adopted, where there is less than 60 per cent. distribution, is stated in the Amendment to be by reference to
such income … as the company shows could not be distributed without prejudice to the requirements of the company's business.
All that the Chancellor has done has been to lift virtually the same words from subsection (5) of the Clause, which refer to a distribution which could not be made
without prejudice to the requirements of its business".
Again, there is no change of substance between the Clause and the Amendment.
The proviso to the Amendment sets the limit above which a company is in the clear, and precisely the same limit appears in the original Clause. There is no change. There is no change of significance as regards the onus of proof, which remains firmly on the shoulders of the company. Again there has been no change. All that the inspector has to do in present circumstances is to raise an assessment and then the onus of proof is firmly on the company.
Yet when these Amendments appeared on the Notice Paper—I do not believe that it was a conspiracy on the part of the Press—one newspaper after another, presumably because they had guidance to that effect, printed words which indicated that in some way or other the Chancellor had made a concession to companies coming within the definition of close companies. The truth is that these particular Amendments do no such thing. I agree with my hon. Friend the Member for Sheffield, Heeley (Sir P. Roberts) that it is impossible to divorce the, percentage in this Clause from the question of onus of proof.
I have already said, because I felt it fair to the Committee to do so, that I do not go so far as the hon. Member for Manchester, Cheetham (Mr. Harold Lever) does in the remarks which he made. I intervened and expressed my


view on that, so I shall say no more about it. But it follows that the percentage in the Clause becomes of paramount importance when one is considering the burden of work on inspectors of taxes. If it is right on merits—I should not suggest doing it on any other grounds—to reduce the percentage as we propose that it should be, there will be the practical consequence of making lighter the burden of work on inspectors of taxes.
I agree that, if one is to accept the Chancellor's general scheme as set out in these Clauses, some percentage must be specified. Whether it should be 60, 50 or 40 per cent. is, perhaps, a matter for argument and opinion. The Clause at present proposes 60 per cent. I quite understand when the Chief Secretary says that, because of Schedule 17, this does not mean that 60 per cent. of gross profit must be distributed. As a result of the way in which Schedule 17, Part II, works, with the definition of distributable profits, what a company will have to distribute in the normal case, if the 60 per cent. is applied, is about 36 per cent. or 39 per cent. depending on whether the Corporation Tax is 35 per cent. or 40 per cent.

Mr. Diamond: Mr. Diamond indicated assent.

Mr. Barber: I see the Chief Secretary nods assent to that. But, if this is so, one cannot go on logically to argue that, under the provisions of the Bill a company will, in the normal case, be able to retain 40 per cent. of its profits because, in the light of the definition of distributable profits in Schedule 17, a company will be able to retain only 24 per cent. or 26 per cent. of gross profits on which Corporation Tax is to be paid. It is really this range of percentages, 24 per cent. or 26 per cent., which we are arguing about. In other words, the question is whether this is enough in the normal case.

Mr. Diamond: I intervene because the right hon. Gentleman keeps on referring to "the normal case". He has used those words four times. It is a ceiling. It is not the normal case.

Mr. Barber: The right hon. Gentleman says that it is a ceiling, but I believe—[Interruption.] Does the hon. and learned Gentleman wish to interrupt?

The Financial Secretary to the Treasury (Mr. Niall MacDermot): It is a

ceiling. The right hon. Gentleman cannot get away from that fact. What he is trying to suggest is that the ceiling is the norm. I do not know on what he bases that. He cannot get away from the fact that it is a ceiling.

Mr. Barber: I was about to say that I entirely agree with what some of my hon. Friends say about the way this will work out in many instances in practice. I believe that in many cases with small companies which will not put up with the expense of appealing, in the normal case it will work out in this way—

The Minister without Portfolio (Sir Eric Fletcher): No.

Mr. Barber: It is no good the Minister without Portfolio just sitting there muttering. We have now had three of the Ministers on the Government Front Bench intervening. I hope that they will allow me to put my case. This has been put to me by reputable accountants who have told me that they believe—it is not my view—that, in practice, what will happen is that in innumerable cases companies will feel that they have to distribute 60 per cent. if the inspector tells them that they should do so and they will not feel that they are in a position to challenge the suggestion made by him.
If the right hon. Gentleman had given us a convincing case for the percentage in the Bill I am sure that my right hon. and hon. Friends would not have wished to press the Amendment. If, alternately, the right hon. Gentleman had said that he was at least prepared to consider a smaller percentage, to look at this again, we would not have pressed the Amendment. I accept the fact that 40 per cent. may not be right, although, on the information that we have been given it seems to be about the right percentage. However, we were open to argument on the point.
We have had no convincing justification for the percentage in the Bill. We have had no answer to the compelling factual arguments of my hon. Friend the Member for Nottingham, South (Mr. William Clark). All we were told was that my hon. Friend was dealing with exceptional cases and that we need not worry about companies which happened to be exceptional. We have had no


promise whatever on behalf of the Government that this matter will be reconsidered. In these circumstances, we shall feel obliged to vote in favour of the Amendment in the name of my hon. Friend.
There is one other matter on which I wonder whether the Chief Secretary could give us an explanation. If in view of the shortage of time he is unable to do so, I shall understand. There appears to be something odd about Amendment No. 708 It refers to Sections 246 and 258 of the Income Tax Act, 1952, and the proviso to Section 246(2) is excepted and is not to apply in the new legislation. What troubles some of us is that the proviso was put in to the advantage of the taxpayer.
I can appreciate that because of the new wording in the Bill and reference to "a reasonable part of its actual income", which is in the proviso, might not be appropriate. It might be that one would have to substitute the words "re-

quired standard". However, it seems that this proviso for the benefit of the taxpayer has been dropped for reasons which I could not quite understand.

Mr. Diamond: I am advised that this is not because there is any sinister or subtle reason connected with the drafting, as the right hon. Gentleman suggested it might be. It is simply because it has been found not to have any practical effect, so there is no point in bringing it forward again.

Question, That the words proposed to be left out stand part of the Clause, put and negatived.

Question proposed, That the proposed words be there inserted.

Amendment proposed to the proposed Amendment, to leave out "sixty" and to insert "forty".—[Mr. W. Clark.]

Question put. That "sixty" stand part of the proposed Amendment:—

The Committee divided: Ayes 191, Noes 169.

Division No. 189.]
AYES
[8.25 p.m.


Abse, Leo
Dunn, James A.
Irving, Sydney (Dartford)


Allaun, Frank (Salford, E.)
Edwards, Rt. Hn. Ness (Caerphilly)
Jay, Rt. Hn. Douglas


Alldritt, Walter
Ennals, David
Johnston, Russell (Inverness)


Armstrong, Ernest
Ensor, David
Jones, Dan (Burnley)


Atkinson, Norman
Fernyhough, E.
Kelley, Richard


Bacon, Miss Alice
Fitch, Alan (Wigan)
Kenyon, Clifford


Bagier, Gordon A. T.
Fletcher, Sir Eric (Islington, E.)
Lawson, George


Barnett, Joel
Fletcher, Ted (Darlington)
Leadbitter, Ted


Beaney, Alan
Fletcher, Raymond (Ilkeston)
Lee, Rt. Hn. Frederick (Newton)


Benn, Ht. Hn. Anthony Wedgwood
Floud, Bernard
Lever, Harold (Cheetham)


Bennett, J. (Glasgow, Bridgeton)
Foley, Maurice
Lever, L. M. (Ardwick)


Bessell, Peter
Fraser, Rt. Hn. Tom (Hamilton)
Lewis, Arthur (West Ham, N.)


Bishop, E. S.
Freeson, Reginald
Lewis, Ron (Carlisle)


Blackburn, F.
Galpern, Sir Myer
Lomas, Kenneth


Blenkinsop, Arthur
Garrett, W. E.
Loughlin, Charles


Boardman, H.
George, Lady Megan Lloyd
Lubbock, Eric


Bowden, Rt. Hn. H. W. (Leics S.W.)
Ginsburg, David
McBride, Neil


Bowen, Roderic (Cardigan)
Greenwood, Rt. Hn. Anthony
McCann, J.


Boyden, James
Gregory, Arnold
MacDermot, Niall


Braddock, Mrs. E. M.
Griffiths, David (Rother Valley)
McGuire, Michael


Bray, Dr. Jeremy
Griffiths, Rt. Hn. James (Llanelly)
McInnes, James


Broughton, Dr. A. D. D.
Grimond, Rt. Hn. J.
McKay, Mrs. Margaret


Buchan, Norman (Renfrewshire, W.)
Hale, Leslie
Mackenzie, Alasdair (Ross &amp; Crom'ty)


Buchanan, Richard
Hamilton, James (Bothwell)
Mackenzie, Gregor (Rutherglen)


Butler, Herbert (Hackney, C.)
Hamilton, William (West Fife)
McLeavy, Frank


Callaghan, Rt. Hn. James
Hannan, William
MacMillan, Malcolm


Carmichael, Neil
Harper, Joseph
Mahon, Simon (Bootle)


Carter-Jones, Lewis
Harrison, Walter (Wakefield)
Manuel, Archie


Castle, Rt. Hn. Barbara
Hart, Mrs. Judith
Mapp, Charles


Coleman, Donald
Hattersley, Roy
Mason, Roy


Conlan, Bernard
Herbison, Rt. Hn. Margaret
Maxwell, Robert


Corbet, Mrs. Freda
Hill, J. (Midlothian)
Mendelson, J. J.


Craddock, George (Bradford, S.)
Hobden, Dennis (Brighton, K'town)
Millan, Bruce




Miller, Dr. M. S.


Crossman, Rt. Hn, R. H. S.
Holman, Percy
Milne, Edward (Blyth)


Cullen, Mrs. Alice
Hooson, H. E.
Molloy, William


Dalyell, Tam
Horner John
Morris, John (Aberavon)


Davies, G. Elfed (Rhondda, E.)
Houghton, Rt. Hn. Douglas
Murray, Albert


Davies, Ifor (Gower)
Howie, W.
Neal, Harold


Davies, S. O. (Merthyr)
Hoy, James
Newens, Stan


Diamond, John
Hughes, Emrys (S. Ayrshire)
Noel-Baker, Francis (Swindon)


Doig, Peter
Hughes, Hector (Aberdeen, N.)
Norwood, Christopher


Donnelly, Desmond
Hunter, Adam (Dunfermline)
Oakes, Gordon


Duffy, Dr. A. E. P.
Hunter, A. E. (Feltham)
Ogden, Eric




O'Malley, Brian
Robertson, John (Paisley)
Thorpe, Jeremy


Oram, Albert E. (E. Ham, S.)
Rodgers, William (Stockton)
Tinn, James


Orme, Stanley
Rogers, George (Kensington, N.)
Tomney, Frank


Oswald, Thomas
Sheldon, Robert
Urwin, T. W.


Owen, Will
Shinwell, Rt. Hn. E.
Varley, Eric G.


Padley, Walter
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)
Wainwright, Edwin


Park, Trevor (Derbyshire, S.E.)
Silverman, Sydney (Nelson)
Walden, Brian (All Saints)


Parker, John
Slater, Joseph (Sedgefield)
Wallace, George


Pearson, Arthur (Pontypridd)
Small, William
White, Mrs. Eirene


Peart, Rt. Hn. Fred
Smith, Ellis (Stoke, S.)
Whitlock, William


Pentland, Norman
Soskice, Rt. Hn. Sir Frank
Wilkins, W. A.


Perry, Ernest G.
Steel, David (Roxburgh)
Willey, Rt. Hn. Frederick


Popplewell, Ernest
Steele, Thomas (Dunbartonshire, W.)
Williams, Clifford (Abertillery)


Price, J. T. (Westhoughton)
Stewart, Rt. Hn. Michael
Willis, George (Edinburgh, E.)


Probert, Arthur
Stones, William
Winterbottom, R. E.


Pursey, Cmdr. Harry
Summerskill, Hn. Dr. Shirley
Wyatt, Woodrow


Randall, Harry
Swingler, Stephen
Yates, Victor (Ladywood)


Rankin, John
Symonds, J. B.



Rees, Merlyn
Taylor, Bernard (Mansfield)
TELLERS FOR THE NOES:


Rhodes, Geoffrey
Thomas, George (Cardiff, W.)
Mrs. Harriet Slater and


Richard, Ivor
Thomson, George (Dundee, E.)
Mr. Harry Gourlay.


Roberts, Albert (Normanton)
Thornton, Ernest





NOES


Agnew, Commander Sir Peter
Glover, Sir Douglas
Mott-Radclyffe, Sir Charles


Alison, Michael (Barkston Ash)
Godber, Rt. Hn. J. B.
Munro-Lucas-Tooth, Sir Hugh


Allason, James (Hemel Hempstead)
Goodhew, Victor
Murton, Oscar


Anstruther-Gray, Rt. Hn. Sir W.
Gower, Raymond
Noble, Rt. Hn. Michael


Astor, John
Grant, Anthony
Nugent, Rt. Hn. Sir Richard


Awdry, Daniel
Grieve, Percy
Osborn, John (Hallam)


Balniel, Lord
Griffiths, Peter (Smethwick)
Page, R. Graham (Crosby)


Barber, Rt. Hn. Anthony
Gurden, Harold
Pearson, Sir Frank (Clitheroe)


Barlow, Sir John
Hall-Davis, A. G. F.
Peel, John


Batsford, Brian
Hamilton, M. (Salisbury)
Percival, Ian


Bell, Ronald
Harris, Frederic (Croydon, N.W.)
Peyton, John


Bennett, Sir Frederic (Torquay)
Harris, Reader (Heston)
Pickthorn, Rt. Hn. Sir Kenneth


Berkeley, Humphry
Harvey, John (Walthamstow, E.)
Pike, Miss Mervyn


Biffen, John
Harvie Anderson, Miss
Pitt, Dame Edith


Biggs-Davison, John
Hawkins, Paul
Pounder, Rafton


Birch, Rt. Hn. Nigel
Heald, Rt. Hn. Sir Lionel
Powell, Rt. Hn. J. Enoch


Black, Sir Cyril
Heath, Rt. Hn. Edward
Prior, J. M. L.


Bossom, Hn. Clive
Higgins, Terence L.
Pym, Francis


Box, Donald
Hill, J. E. B. (S. Norfolk)
Ramsden, Rt. Hn. James


Boyd-Carpenter, Rt. Hn. J.
Hobson, Rt. Hon. Sir John
Rawlinson, Rt. Hn. Sir Peter


Boyle, Rt. Hn. Sir Edward
Hornsby-Smith, Rt. Hn. Dame P.
Renton, Rt. Hn. Sir David


Brewis, John
Howard, Hn. G. R. (St. Ives)
Ridley, Hn. Nicholas


Brinton, Sir Tatton
Hunt, John (Bromley)
Ridsdale, Julian


Brown, Sir Edward (Bath)
Hutchison, Michael Clark
Roberts, Sir Peter (Heeley)


Bruce-Gardyne, J.
Iremonger, T. L.
Robson Brown, Sir William


Bullus, Sir Eric
Irvine, Bryant Godman (Rye)
Roots, William


Burden, F. A.
Jenkin, Patrick (Woodford)
Scott-Hopkins, James


Buxton, Ronald
Jennings, J. C.
Sharples, Richard


Chataway, Christopher
Kaberry, Sir Donald
Sinclair, Sir George


Chichester-Clark, R.
Kerr, Sir Hamilton (Cambridge)
Smith, Dudley (Br'ntf'd &amp; Chiswick)


Clark, William (Nottingham, S.)
Kershaw, Anthony
Spearman, Sir Alexander


Clarke, Brig. Terence (Portsmth, W.)
King, Evelyn (Dorset, S.)
Stanley, Hn. Richard


Cole, Norman
Kirk, Peter
Stoddart-Scott, Col. Sir Malcolm


Cooke, Robert
Langford-Holt, Sir John
Studholme, Sir Henry


Cooper-Key, Sir Neill
Legge-Bourke, Sir Harry
Talbot, John E.


Cordle, John
Lewis, Kenneth (Rutland)
Taylor, Edward M. (G'gow, Cathcart)


Costain, A. P.
Litchfield, Capt. John
Teeling, Sir William


Courtney, Cdr. Anthony
Lloyd, Ian (P'tsm'th, Langstone)
Temple, John M.


Craddock, Sir Beresford (Spelthorne)
Lloyd, Rt. Hn. Selwyn (Wirral)
Thomas, Rt. Hn. Peter (Conway)


Crosthwaite-Eyre, Col. Sir Oliver
Longden, Gilbert
Turton, Rt. Hn. R. H.


Cunningham, Sir Knox
McAdden, Sir Stephen
van Straubenzee, W. R.


Curran, Charles
MacArthur, Ian
Walder, David (High Peak)


Davies, Dr. Wyndham (Perry Barr)
McLaren, Martin
Walker, Peter (Worcester)


d'Avigdor-Goldsmid, Sir Henry
McMaster, Stanley
Walker-Smith, Rt. Hn. Sir Derek


Dean, Paul
McNair-Wilson, Patrick
Wall, Patrick


Digby, Simon Wingfield
Maitland, Sir John
Ward, Dame Irene


Dodds-Parker, Douglas
Mathew, Robert
Weatherill, Bernard


Elliott, R. W.(N'c'tle-upon-Tyne,N.)
Maude, Angus
Webster, David


Emery, Peter
Maudling, Rt. Hn. Reginald
Whitelaw, William


Errington, Sir Eric
Mawby, Ray
Wills, Sir Gerald (Bridgwater)


Eyre, Reginald
Maxwell-Hyslop, R. J.
Wilson, Geoffrey (Truro)


Farr, John
Maydon, Lt.-Cmdr. S. L. C.
Woodhouse, Hon. Christopher


Fisher, Nigel
Meyer, Sir Anthony
Younger, Hn. George


Fletcher-Cooke, Sir John (S'pton)
Mills, Peter (Torrington)



Foster, Sir John
Mills, Stratton (Belfast, N.)
TELLERS FOR THE NOES:


Fraser, Ian (Plymouth, Sutton)
Mitchell, David
Mr. Jasper More and


Gammans, Lady
Monro, Hector
Mr. Geoffrey Johnson Smith.


Giles, Rear-Admiral Morgan
Morrison, Charles (Devizes)

Question put, That the proposed words be there inserted:—

The Committee divided: Ayes 190, Noes 168.

Division No. 190.]
AYES
[8.36 p.m.


Abse, Leo
Hale, Leslie
O'Malley, Brian


Allaun, Frank (Salford, E.)
Hamilton, James (Bothwell)
Oram, Albert E. (E. Ham, S.)


Alldritt, Walter
Hamilton, William (West Fife)
Orme, Stanley


Armstrong, Ernest
Hannan, William
Oswald, Thomas


Atkinson, Norman
Harper, Joseph
Owen, Will


Bacon, Miss Alice
Harrison, Walter (Wakefield)
Padley, Walter


Bagier, Gordon A. T.
Hart, Mrs. Judith
Park, Trevor (Derbyshire, S.E.)


Barnett, Joel
Hattersley, Roy
Parker, John


Beaney, Alan
Herbison, Rt. Hn. Margaret
Pearson, Arthur (Pontypridd)


Benn, Rt. Hn. Anthony Wedgwood
Hill, J. (Midlothian)
Peart, Rt. Hn. Fred


Bennett, J. (Glasgow, Bridgeton)
Hobden, Dennis (Brighton, K'town.)
Pentland, Norman


Bessell, Peter
Holman, Percy
Perry, Ernest G.


Bishop, E. S.
Hooson, H. E.
Popplewell, Ernest


Blackburn, F.
Horner, John
Price, J. T. (Westhoughton)


Blenkinsop, Arthur
Houghton, Rt. Hn. Douglas
Probert, Arthur


Boardman, H.
Howie, W.
Pursey, Cmdr. Harry


Bowden, Rt. Hn. H. W.(Leics, S.W.)
Hoy, James
Randall, Harry


Bowen, Roderic (Cardigan)
Hughes, Emrys (S. Ayrshire)
Rankin, John


Boyden, James
Hughes, Hector (Aberdeen, N.)
Rees, Merlyn


Braddock, Mrs. E. M.
Hunter, Adam (Dunfermline)
Rhodes, Geoffrey


Bray, Dr. Jeremy
Hunter, A. E. (Feltham)
Richard, Ivor


Broughton, Dr. A. D. D.
Irving, Sydney (Dartford)
Roberts, Albert (Normanton)


Buchan, Norman (Renfrewshire, W.)
Jay, Rt. Hn. Douglas
Robertson, John (Paisley)


Buchanan, Richard
Johnston, Russell (Inverness)
Rodgers, William (Stockton)


Butler, Herbert (Hackney, C.)
Jones, Dan (Burnley)
Rogers, George (Kensington, N.)


Callaghan, Ht. Hn. James
Kelley, Richard
Sheldon, Robert


Carmichael, Neil
Kenyon, Clifford
Shinwell, Rt. Hn. E.


Carter-Jones, Lewis
Lawson, George
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)


Castle, Rt. Hn. Barbara
Leadbitter, Ted
Silverman, Sydney (Nelson)


Coleman, Donald
Lee, Rt. Hn. Frederick (Newton)
Slater, Joseph (Sedgefield)


Conlan, Bernard
Lever, Harold (Cheetham)
Small, William


Corbet, Mrs. Freda
Lever, L. M. (Ardwick)
Smith, Ellis (Stoke, S.)


Craddock, George (Bradford, S.)
Lewis, Arthur (West Ham, N.)
Soskice, Rt. Hn. Sir Frank


Crossman, Rt. Hn. R. H. S.
Lewis, Ron (Carlisle)
Steel, David (Roxburgh)


Cullen, Mrs. Alice
Lomas, Kenneth
Steele, Thomas (Dunbartonshire, W.)


Dalyell, Tam
Loughlin, Charles
Stewart, Rt. Hn. Michael


Davies, G. Elfed (Rhondda, E.)
Lubbock, Eric
Stones, William


Davies, Ifor (Gower)
McBride, Neil
Summerskill, Hn. Dr. Shirley


Davies, S. O. (Merthyr)
McCann, J.
Swingler, Stephen


Diamond, John
MacDermot, Niall
Symonds, J. B.


Doig, Peter
McGuire, Michael
Taylor, Bernard (Mansfield)


Donnelly, Desmond
McInnes, James
Thomas, George (Cardiff, W.)


Duffy, Dr. A. E. P.
McKay, Mrs. Margaret
Thomson, George (Dundee, E.)


Dunn, James A.
Mackenzie, Alasdair (Ross &amp; Crom'ty)
Thornton, Ernest


Edwards, Rt. Hn. Ness (Caerphilly)
Mackenzie, Gregor (Rutherglen)
Tinn, James


Ennals, David
McLeavy, Frank
Tomney, Frank


Ensor, David
MacMillan, Malcolm
Urwin, T. W.


Fernyhough, E.
Mahon, Simon (Bootle)
Varley, Eric G.


Fitch, Alan (Wigan)
Manuel, Archie
Wainwright, Edwin


Fletcher, Sir Eric (Islington, E.)
Mapp, Charles
Walden, Brian (All Saints)


Fletcher, Ted (Darlington)
Mason, Roy
Wallace, George


Fletcher, Raymond (Ilkeston)
Maxwell, Robert
White, Mrs. Eirene


Floud, Bernard
Mendelson, J. J.
Whitlock, William


Foley, Maurice
Millan, Bruce
Wilkins, W. A.


Fraser, Rt. Hn. Tom (Hamilton)
Miller, Dr. M. S.
Willey, Rt. Hn. Frederick


Freeson, Reginald
Milne, Edward (Blyth)
Williams, Clifford (Abertillery)


Galpern, Sir Myer
Molloy, William
Willis, George (Edinburgh, E.)


Garrett, W. E.
Morris, John (Aberavon)
Winterbottom, R. E.


George, Lady Megan Lloyd
Murray, Albert
Wyatt, Woodrow


Ginsburg, David
Neal, Harold
Yates, Victor (Ladywood)


Greenwood, Rt. Hn. Anthony
Newens, Stan



Gregory, Arnold
Noel-Baker, Francis (Swindon)
TELLERS FOR THE NOES:


Griffiths, David (Rother Valley)
Norwood, Christopher
Mrs. Harriet Slater and


Griffiths, Rt. Hn. James (Llanelly)
Oakes, Gordon
Mr. Harry Gourlay.


Grimond, Rt. Hn. J.
Ogden, Eric





NOES


Agnew, Commander Sir Peter
Batsford, Brian
Boyd-Carpenter, Rt. Hn. J.


Alison, Michael (Barkston Ash)
Bell, Ronald
Boyle, Rt. Hn. Sir Edward


Allason, James (Hemel Hempstead)
Bennett, Sir Frederic (Torquay)
Brewis, John


Anstruther-Gray, Rt. Hn. Sir W.
Berkeley, Humphry
Brinton, Sir Tatton


Astor, John
Biggs-Davison, John
Brown, Sir Edward (Bath)


Awdry, Daniel
Birch, Rt. Hn. Nigel
Bruce-Gardyne, J.


Balniel, Lord
Black, Sir Cyril
Bullus, Sir Eric


Barber, Rt. Hn. Anthony
Bossom, Hn. Clive
Burden, F. A.


Barlow, Sir John
Box, Donald
Buxton, Ronald




Chataway, Christopher
Hill, J. E. B. (S. Norfolk)
Peel, John


Chichester-Clark, R.
Hobson, Rt. Hn. Sir John
Percival, Ian


Clark, William (Nottingham, S.)
Hornsby-Smith, Rt. Hn. Dame P.
Peyton, John


Clarke, Brig. Terence (Portsmth, W.)
Howard, Hn. G. R. (St. Ives)
Pickthorn, Rt. Hn. Sir Kenneth


Cole, Norman
Hunt, John (Bromley)
Pike, Miss Mervyn


Cooke, Robert
Hutchison, Michael Clark
Pitt, Dame Edith


Cooper-Key, Sir Neill
Iremonger, T. L.
Pounder, Rafton


Cordle, John
Irvine, Bryant Godman (Rye)
Powell, Rt. Hn. J. Enoch


Costain, A. P.
Jenkin, Patrick (Woodford)
Prior, J. M. L.


Courtney, Cdr. Anthony
Jennings, J. C.
Pym, Francis


Craddock, Sir Beresford (Spelthorne)
Kaberry, Sir Donald
Ramsden, Rt. Hn. James


Crosthwaite-Eyre, Col. Sir Oliver
Kerr, Sir Hamilton (Cambridge)
Rawlinson, Rt. Hn. Sir Peter


Cunningham, Sir Knox
Kershaw, Anthony
Renton, Rt. Hn. Sir David


Curran, Charles
King, Evelyn (Dorset, S.)
Ridley, Hn. Nicholas


Davies, Dr. Wyndham (Perry Barr)
Kirk, Peter
Ridsdale, Julian


d'Avigdor-Goldsmid, Sir Henry
Langford-Holt, Sir John
Roberts, Sir Peter (Heeley)


Dean, Paul
Legge-Bourke, Sir Harry
Robson Brown, Sir William


Digby, Simon Wingfield
Lewis, Kenneth (Rutland)
Roots, William


Dodds-Parker, Douglas
Litchfield, Capt. John
Scott-Hopkins, James


Elliott, R. W.(N'c'tle-upon-Tyne, N.)
Lloyd, Ian (P'tsm'th, Langstone)
Sharples, Richard


Emery, Peter
Lloyd, Rt. Hn. Selwyn (Wirral)
Sinclair, Sir George


Errington, Sir Eric
Longden, Gilbert
Smith, Dudey (Br'ntf'd &amp; Chiswick)


Eyre, Reginald
McAdden, Sir Stephen
Spearman, Sir Alexander


Farr, John
MacArthur, Ian
Stanley, Hn. Richard


Fisher, Nigel
McLaren, Martin
Stoddart-Scott, Col, Sir Malcolm


Fletcher-Cooke, Sir John (S'pton)
McMaster, Stanley
Studholme, Sir Henry


Foster, Sir John
McNair-Wilson, Patrick
Talbot, John E.


Fraser, Ian (Plymouth, Sutton)
Maitland, Sir John
Taylor, Edward M. (G'gow,Cathcart)


Gammons, Lady
Mathew, Robert
Teeling, Sir William


Giles, Rear-Admiral Morgan
Maude, Angus
Temple, John M.


Glover, Sir Douglas
Maudling, Rt. Hn. Reginald
Thomas, Rt. Hn. Peter (Conway)


Godber, Rt. Hn. J. B.
Mawby, Ray
Turton, Rt. Hn. R. H.


Goodhew, Victor
Maxwell-Hyslop, R. J.
van Straubenzee, W. R.


Gower, Raymond
Maydon, Lt.-Cmdr. S. L. C.
Walder, David (High Peak)


Grant, Anthony
Meyer, Sir Anthony
Walker, Peter (Worcester)


Grieve, Percy
Mills, Peter (Torrington)
Walker-Smith, Rt. Hn. Sir Derek


Griffiths, Peter (Smethwick)
Mills, Stratton (Belfast, N.)
Wall, Patrick


Gurden, Harold
Mitchell, David
Ward, Dame Irene


Hall-Davis, A. G. F.
Monro, Hector
Weatherill, Bernard


Hamilton, M. (Salisbury)
Morrison, Charles (Devizes)
Webster, David


Harris, Frederic (Croydon, N.W.)
Mott-Radclyffe, Sir Charles
Whitelaw, William


Harris, Reader (Heston)
Munro-Lucas-Tooth, Sir Hugh
Wills, Sir Gerald (Bridgwater)


Harvey, John (Walthamstow, E.)
Murton, Oscar
Wilson, Geoffrey (Truro)


Harvie Anderson, Miss
Noble, Rt. Hn. Michael
Woodhouse, Hon. Christopher


Hawkins, Paul
Nugent, Rt. Hn. Sir Richard
Younger, Hn. George


Heald, Rt. Hn. Sir Lionel
Osborn, John (Hallam)



Heath, Rt. Hn. Edward
Page, R. Graham (Crosby)
TELLERS FOR THE NOES:


Higgins, Terence L.
Pearson, Sir Frank (Clitheroe)
Mr. Jasper More and




Mr. Geoffrey Johnson Smith.

Further Amendments made: In page 93, line 14, at end insert:
(a) regard shall be had not only to the current requirements of the company's business but also to such other requirements as may be necessary or advisable for the maintenance and development of that business, but for this purpose sections 246(2) and (3) and 258(1) and (4) of the Income Tax Act 1952, except section 246(2) proviso, shall apply as they applied for the corresponding purpose of section 245.

In page 93, line 32, leave out sub section (5).

In page 93, line 43, after "in", insert "respect of".

In page 94, line 17, leave out "for purposes of section 44 of this Act" and insert:
in determining the income tax payable by the company in respect of distributions for the later period or, as the case may be, in arriving at any surplus of franked investment income"—[Mr. Diamond.]

Question proposed, That the Clause, as amended, stand part of the Bill.

8.45 p.m.

Mr. van Straubenzee: We have had a long and detailed discussion on important parts of the Clause, and I am sure that we do not need to take more than a few more minutes on it, but I do not think that it would be right to part with the Clause, as it has been amended, without considering certain aspects of it, some of which have, admittedly, been touched on. After all, this Clause is the pith, the absolute centre, of the close company provisions, and I must frankly say that I am very disappointed that the Question, "That the Clause, as amended, stand part of the Bill" should be proposed with the Clause in its present form. We have missed the opportunity of making substantial improvements in it.
As the Clause and all the close company provisions stand, the tax system will, I believe, bear proportionately much more sharply on those who decide


to trade by way of limited company procedure which we all understand and acknowledge, which has stood us in good stead and from which many of our great and growing companies have stemmed. The provisions of the Clause are most startling when one considers the tax charged on individuals trading together rather than in the form of a limited company.
I do not want to bandy figures to and fro across the Committee, even if I am capable of doing so, but I would say that this is extremely well-illustrated if one takes the case of a business earning £30,000 a year which has three equal owners. If they trade as a partnership, the total tax per person is £4,027. As a close company, if they have a 60 per cent. distribution ceiling—a word which I use to please the Chief Secretary—the total immediate tax is £4,951. If one allows for an eventual sale and consequent tax arising by reason of earlier Clauses of the Bill, the tax will then be £5,467 in all. Therefore, even if we took a 40 per cent. distribution, a figure which we were arguing earlier, the immediate tax is £4,417.
These figures illustrate most strikingly how we are likely, by the provisions of Clause 72 and the other Clauses dealing with close companies—perhaps inadvertently—to hit proportionately much more hardly those who choose to carry on their commercial or business activities in this way. I believe that both the Chief Secretary and the Minister without Portfolio—both of whom have behind them very distinguished careers in what one might call civilian life—do not intend this result. I accept of course, without reservation, the protestations of their belief in this type of trading corporation at their face value.
What worries me is that the effect of this Clause and the other provisions will be very much more harsh than they have appreciated. Time alone will tell. We have argued this time and time again and we do not want to go back ad infinitum over the same arguments. We cannot part with this pith and central Clause in these provisions without it being said clearly not only that the business community itself has the greatest anxiety—though the result of protracted discussion on the Floor of the Committee may well have the beneficial result of

clearing away certain anxieties—but that the result will be of a far more severe nature than those who propose that we should accept this Clause always appreciate.

Mr. Rafton Pounder: We have had a very long and, I think, fruitful discussion on what is one of the most important Clauses—if not the most important Clause—in the Finance Bill. The one type of remark which has recurred time without number during these debates has been the use by hon. Members of such phrases as "It would appear to me", "In my considered opinion", and "In practice it may work out as"—phrases which still indicate a substantial degree of uncertainty about the precise effect of many of the phrases embodied in the Clause. If I had to single out one thing which has pleased me in this discussion, it would be the deletion of subsection (5) from this Clause, because this was partly tied up in a small way with the onus of proof provisions.
We are now discussing this matter in terms of the Question that the Clause stand part. I should like to regionalise the discussions for a few moments. In an area like Northern Ireland, where the great bulk of the companies are within the closed catgeory—the overwhelming majority of companies in Northern Ireland are either small or medium-sized private concerns—there can be no doubt that the provisions of this Clause are likely adversely to affect the economic development of that part of the United Kingdom.
It has been contended repeatedly by hon. and right hon. Members opposite and by the Chief Secretary, within the last few hours, that one of the avowed aims of the Corporation Tax is to help companies to develop and extend by encouraging the retention of profits. It has also been said repeatedly that many hon. Members dislike monopolies and I would go along with that view. However, if we are to implement a form of taxation which will strike hard at the small private company, I would submit that, to a large extent, they are likely to be thrown, due to considerable degree of vulnerability, to the jaws of the larger units. The Clause and the effect of Corporation Tax on close companies could well result in many of them going to the wall. That would be regrettable.
If companies are to expand and are to go to development areas, as we all wish them to do, they need finance, in many cases substantial sums. This finance has—not exclusively, but in the main—come from retained profits. I am at a loss to understand how, under the terms of the Clause, private close companies will be able to retain anything like the volume of profits which is necessary for their continued expansion.
I go so far as to say that something like 90 per cent. of all companies in Northern Ireland are now within the category of close companies. I hope, therefore, that on Report the Chief Secretary will consider a way of alleviating the worst aspects of the Corporation Tax as it affects close companies in development areas.
Last week, innumerable references were made to certain of the promises concerning development areas that were made by the party opposite at the last election. I shall not bore the Committee by repeating them. I ask the Chief Secretary, however, to give the most serious consideration to these close company provisions as they affect development areas.
In a nutshell, I suggest that the ultimate effect of the Clause, even allowing for the Amendments made by the Chancellor of the Exchequer, will be to handicap initiative, to stifle expansion and to kill stone dead the possibility of the "rags-to-riches" success story. In all seriousness, I say to the Chief Secretary that the Clause could have extremely grave consequences for an area such as Northern Ireland.

Mr. Gower: The Chief Secretary will now be quite sure that we are unhappy about the form of the Clause. Our objections to it have not arisen from any desire to be awkward. The Chief Secretary knows that we have had no desire to obstruct the passage of the Bill or any part of it. The fact is that we are extremely anxious, and we are not alone in this.
The right hon. Gentleman knows that those who preside over the destinies of close companies, whether medium or small in size, are also deeply anxious. I have spoken to a number of those people during

the weekend and I assure the Chief Secretary that they have been following the proceedings of this Committee with a good deal of attention. They are not inexperienced in these matters. Despite all the Amendments which have been made, and despite the importance of those Amendments, those who manage the affairs of close companies are not convinced that their anxieties need continue no longer. They are still apprehensive.
This is the opportunity for the Chief Secretary to answer the question which has been asked time and time again: why is it that in the view of the Government, retentions by the great public companies appear to be the supreme virtue and why, on the other hand, in the case of the close companies, does it appear that distribution is the finest quality of all? That is the question which the right hon. Gentleman has not answered. What he has said, in effect, is that the Clause will not have that result. We are convinced that it will, or that it is almost certain to have that effect.
9.0 p.m.
I fear that if the Clause is not amended it will be more difficult, if not impossible, for small firms to develop into the giant organisations which have meant so much to our economy. Indeed, I doubt if Marks and Spencers, Boots or G.U.S. could have grown into their present sizes had they developed with the kind of financial restrictions imposed by the Bill.
I am glad that my hon. Friend the Member for Belfast, South (Mr. Pounder) drew attention to the relationship between the impact of the Clause on close companies and the Government's avowed policy of helping the development districts. In many cases the large public companies are not the organisations which are bringing special aid to the development district. Often they cannot do so, partly because of the reduced labour force available in smaller areas, and the small family, close concern conveniently provides this sort of aid and development. I hope that the Financial Secretary will consider our fears in that light.
We leave the Clause reluctantly and with great anxiety. I hope that the right hon. Gentleman will not feel that the assurances he has given with such confidence are entirely correct. I hope that


he will consider not only what we have said, but experienced opinion outside the Committee. These are matters of great consequence and the Government must consider them in that light.

Mr. Patrick Jenkin: I raise a matter which has not been touched upon, although an Amendment was tabled to cover it. Unfortunately, that Amendment was not selected. It arises out of the proviso to subsection (2), which gives an abatement to companies with incomes of less than £9,000. However, the provision is qualified by the reference to
… a trading company not having any associated company …".
and the Amendment which was not selected was designed to remove that embargo and enable a group of companies to be treated as one for the purpose of abatement.
The way in which the provision would have worked was simple. It would have had the effect of reducing, for the very small company, the required standard, as defined, to substantially low figures, much smaller than the ordinary 60 per cent. rule would produce. I hope that the Chief Secretary will consider this matter between now and Report with a view to amending the Clause.
It seems unfair that if a small company happens to have, say, one associated company, it should be automatically denied the benefit of this substantial relief. It would appear perfectly simple to treat groups of small companies so that the group as a whole could claim under the abatement scheme—that is, if their aggregate incomes comply with the £9,000 provision. Obviously, if the income of the group was above that level there would be no room for the operation of abatement. Since we have been told that the Government are anxious to help smaller companies, they should apply the provision to such groups.
I come to the question of the exclusion of the proviso to Section 246(2) of the Income Tax Act, 1952, as imported into the Clause by the Chancellor's Amendment No. 708. The Chief Secretary said that the proviso had been left out because it had never appeared to have had any practical significance. The proviso is intended to make sure that where a company makes a reasonable distribution of income, the fact that it has at some time

engaged in any of the nefarious practices covered by Section 246(2), like redeeming preference shares, or redeeming loans, or engaging in imaginary or fictitious transactions should not lead to a Surtax direction being made. The Clause now applies this for Income Tax and Surtax in regard to a 60 per cent. ceiling instead of to a 100 per cent. ceiling.
One could imagine that with a 100 per cent. ceiling the proviso might have no application, but with a 60 per cent. ceiling a company might apply the 40 per cent. margin as it wished. If it applies the 40 per cent. in redeeming its preference shares this is to be disallowed under the Clause, and the norm applies when taking that into account. It may well be that the proviso would make a distinction if the company, at the same time, made what was considered to be a reasonable distribution.
I am not entirely convinced one way or the other, but I am not entirely happy that the mere fact that no company has had to import the protection of the proviso to Section 246(2) is necessarily any guide that it would not have perfectly valid reasonable need for this protection for the future. As it is expressly excluded by the Chief Secretary's Amendment, it is incumbent on him to give a little more explanation to satisfy the Committee that it would not apply in circumstances likely to affect these companies in the future.

Mr. Lubbock: I, too, would like the Chief Secretary to give a further explanation of this proviso. Although I am satisfied that we have made considerable improvements to the Clause, when I put down my Amendment No. 77 I did not think that the proviso was essential, and I had noticed that the Government's Amendment No. 707 had struck it out while putting in these criteria by which reasonable distribution is to be determined. At least we have got out of the Government a much more sensible approach to the subject than we had under the Clause as first drafted.
If I could be sure that the Chief Secretary's assurances on the way in which the 60 per cent. is to be looked at would be binding on the inspectors, I should feel perfectly happy about the Clause. The point is that we have large numbers of inspectors who will be looking at different cases, and I am afraid that


many of them will not have read the Chief Secretary's words or, if they have, will not have understood that they are to be interpreted exactly as the special commissioners would have interpreted the approach to Surtax. We therefore have a position in which no company will be required by this legislation to distribute more than it would have been required to distribute under the previous legislation, and that is exactly what I would have hoped we would bring about in this Bill.
The Chief Secretary says that it is no part of the Government's case that one should force close companies to distribute—if I may put it rather crudely—more than is good for them, or more than is good for the health of the business. That is what we should all like to see. He said repeatedly in dealing with the Amendment that this is the Government's object. Therefore, as I say, I am very happy with some of the improvements that have been made to the Clause, and also with the expressions of the Government's intentions. It is rather a pity if that is the case that we could not have a concession on the onus of proof. This strikes me as being one way in which the Chief Secretary could have given enormous reassurance to companies affected by Clause 72. If it were not for that, I should be perfectly happy with this Clause.

Sir L. Heald: I have taken part in discussion of this Clause only on the subject of onus of proof. I shall not say more about that, but the Question before the Committee enables me to speak with a little more detachment and to say that it should be on record that the efforts of the Opposition in this case have produced very substantial improvement in the Clause. There is no doubt at all that as the Bill was originally drafted this part of it would have been absolutely disastrous to the small man developing a company.
I was prepared and able to give in complete detail particulars of a very striking case in which a man has developed a remarkable business. It would not be appropriate to go into that now. His position, according to his expert advisers, of whom I am not one—I have no personal interest in the matter except

close knowledge of the individual concerned—would have been rendered disastrous. I was anxious to know what was thought by the expert advisers. They have taken the view that the Amendments which have been made will have a considerable beneficial effect. I agree with my hon. Friends who say that this is not by any means certain yet, and with the hon. Member for Orpington (Mr. Lubbock) who said that it depends to some extent on the illustration of the way in which these matters are dealt with. We believe that the commissioners will deal with the matter in a fair and reasonable manner.
The fact remains that an improvement has been made, but we must not allow the Government and their spokesmen to say that they have been generous, have recognised justice and all that kind of thing. They have been forced by the strength and efficiency of the Opposition to make concessions. That is the way in which Parliament should operate in this Committee.
The other day I heard that there was a discussion on television. I did not hear it because I was otherwise engaged in this building. I understand that the Chancellor of the Exchequer took the view that people had been very unfair to him. He said, "You do not really think that I want to destroy these people with British initiative, like Lord Nuffield, in the past, and all that kind of thing. I do not want to do that, so, of course, I am making amendments". I understand that someone made the rather pointed comment, "Are you amending your own Finance Bill, or someone else's?" We must remember that the right hon. Gentleman and the Government were responsible for introducing this Bill, which contains provisions such as those we have been fighting against and many others on which we have not been able to get concessions. It is not their generosity, but the fighting force put in by my hon. and right hon. Friends and the logic of the case, which has produced these results.

Mr. Kenneth Lewis: I shall intervene only briefly, although I do not think we need apologise for time spent on this Clause, for it is a very important one. I do not know how much notice the Chief Secretary takes of his own back benchers.


Having listened to some of the speeches that they have made, I do not think that he has taken a great deal of notice of them. There was an intervention earlier by one of his hon. Friends in which it was suggested that businessmen did not understand, or try to understand, what was being done by this Bill.
I can appreciate that they might have difficulty in understanding the Bill or keeping pace with the changes which have taken place in it, but to suggest that businessmen are not concerned about what is to happen to them at the end of 1966 when the Bill operates comes rather strangely from an hon. Member opposite who was an accountant. I doubt very much whether the Chief Secretary would accept this if he were not in his present position, but himself was acting as an accountant. Any businessman knows full well that when changes in taxation of this or any other sort take place in a Finance Bill he is bound for his own good to find out. If he does not try to find out for himself, his accountant will soon tell him that it will affect him.

The Temporary Chairman: I am waiting to hear the hon. Member mention Clause 72.

9.15 p.m.

Mr. Lewis: This was raised on one of the Amendments. The Clause has been considerably improved since the Opposition have had a go at it. It has been improved for the small businessman. Nevertheless, there is still concern about how it will affect the small business. Not even Liberal Members have pointed out that it often happens with a small company that there is a content of profit sharing. I have a small company. There is a profit-sharing content in it. What will happen if a firm distributes a considerable amount of its profit in bonus payments, in a profit-sharing exercise? It might say to the tax inspector, "What we have left is wholly required, or almost wholly required, or at least 30 per cent. required", which would be more than is permitted under the Bill; "We must have the right to plough back at least 30 per cent. because of what we have already paid out to our employees".
This can happen with many small companies. It is the kind of thing which I should have thought right hon. and

hon. Members opposite would want to encourage. We have to be convinced that the tax inspector will look with favour upon such a situation. I hope that the Chief Secretary will tell us whether, in the distribution of profits, profit sharing will be taken fully into account.
My hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) has referred to the phrase
not having an associated company.
This is important, because there are companies which have associated companies which are not active. If a company is not active, is not trading, is not making money, but is an associated company, I presume that it will not have any effect upon the allowances which will be permitted to the close company concerned. If a company had a dummy associated company and that associated company was counted as affecting the kind of advantages to be given to the main company, a liquidation might have to take place. The company might have been created for a special reason, perhaps to maintain a name.
The Clause probably affects more people apart from the general taxpayer than any other. The number of large businessmen is small. We have spent a great deal of time debating the effect of the Bill on the large businessmen. The small businessman is the big businessman of tomorrow. We are dealing with the seed corn. We are dealing with the future exporter. Therefore, we ought to encourage the growth of the small business.
The Chief Secretary was very reticent on the question of onus of proof. If the businessman is worried about the effect of the Clause, the Chief Secretary can go a long way to help him by arranging that the onus of proof should be put back to where it was before: it should be on the commissioners. If there has been a change it is reasonable that the businessman outside should presume that there has been a change for a purpose. Therefore, if the Chief Secretary will not concede this, the businessman outside will naturally accept the fact that this change has been made so as to make things worse for him.
If on the other hand the Chief Secretary can come forward either now or on Report and say that he concedes that


we should go back to the position as it was before then, as he knows these matters are reasonably sorted out as between the tax inspector, the commissioners and the businessman and there is not normally any difficulty about an amenable solution being found when questions of distribution are discussed, at least it will impress upon the businessman that the Government do not intend to have a special go at the small business but intend to encourage it.

Mr. Diamond: I will do my best to answer shortly all the questions that have been put to me.
The hon. Member for Wokingham (Mr. van Straubenzee) first alleged that the proposals in this Clause taken together with Corporation Tax would deal harshly with corporations. He said that we should not bandy figures and I agree that individual examples are not very conclusive. I will therefore deal shortly with the totality of the position.
The present situation is that we are proposing a new form of taxation to replace Income Tax and Profits Tax with Corporation Tax, which will, so far as all domestic companies are concerned, comparing like with like, result in an alleviation of tax to the extent of some £100 million approximately which, of course, is the amount which would have been suffered by companies trading abroad if certain Amendments had not been brought forward. All domestic companies, therefore, are sharing in the benefit of £100 million.
How do they share in it? Those which distribute less than 51½ per cent, get a benefit. Those which distribute more than 51½ per cent. have a heavier burden of tax to bear. That is the short situation. All that the hon. Gentleman has got to ask himself with regard to any company, be it affected by this Clause or not, is whether it is distributing more or less than that. He will bear in mind that the average distribution is about 50 per cent., so that if the present pattern continues the person making the average distribution is not prejudiced at all. He shares with every other company, to the extent of their profits proportionately, in the general benefit of £100 million.
That is the overall situation. There is nothing in this Clause which bears harshly

on any company at all. It merely, as everybody recognises, protects the honest and straightforward taxpayer against that kind of taxpayer who seeks to avoid his fair share of the burden by keeping his profits in a cash box which he calls a company, and avoiding them coming into the daylight and being susceptible to taxation.
The hon. Member for Belfast, South (Mr. Pounder) said, among other things, that this Clause would result in small companies going to the wall. I do not think he would have said that if he had listened to the whole of the debate. However, perhaps he did not have an opportunity of doing so.
The special point that he made was in connection with development districts. This Clause provides for that very point. If a company trading in a development district has to have reserves greater than it would have had if it were not trading in a development district—that is the case which the hon. Gentleman was making—this is one of the relevant factors in satisfying the Inland Revenue as to the level of distribution.
That is introduced in the Bill. That is in the wording of the Bill itself. It would not be relevant otherwise, but if there are, as the hon. Member stipulates, special circumstances which affect a business trading in a development district of a kind which require additional reserves, that would be relevant. For example, the hon. Member may say that in a certain development district people are not very flush with money and are rather slow in paying their debts and that in that company it was necessary to have more capital to finance the turnover of the debtors. If that were the case it would be a relevant argument to put before the inspectors. I am glad that the hon. Member raised the point. It is specially covered in this Bill in this way.
The hon. Member for Barry (Mr. Gower) referred to the deep anxiety, which I recognised is there, and which I hope the debate has dissipated, that retention was regarded by the Government as the supreme virtue for the large company and distribution a supreme virtue for the small company. The answer is that neither statement represents the situation, which is that for a big company the supreme virtue is plough-back and for


the small company the surpreme virtue is plough-back. In neither case is it pure retention or pure distribution. What we are saying is that there is no point in a company which does not need its realised profits for reserves or development hanging on to them—let the company distribute them; there is no wisdom in allowing a company which merely seeks to avoid tax to carry on in that way any more than it has been allowed to do it in the past 13 years.
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) drew attention to the substantial relief in the abatement provisions. I am grateful to him, because that point was not brought out sufficiently clearly in the debate hitherto. But the hon. Member raised the point because he asked why we should not allow that substantial relief to each member of a group rather than a group as a whole.

Mr. Patrick Jenkin: Obviously I did not make myself clear to the Chief Secretary, for which I apologise. Knowing him, I know that it is my fault and not his. I suggested that the right approach is that where there is a group of companies they should be aggregated. If it turned out that the group should be entitled to relief then the relief should apply, but if the group as aggregated is not entitled to relief it would not be applicable. I agree that it would be quite wrong to apply relief to each individual company in the group.

Mr. Diamond: I am sorry if I misunderstood the hon. Member. As I understood him, I read into his remarks that intention, because I cannot see what advantage there would be otherwise in what the hon. Member proposes. He and I agree that if there is a group of compaines it would defeat the object of the Amendment to allow rebate to each member of the group, but if he proposes aggregation I cannot see where the advantage lies. Perhaps the hon. Member is referring to a discussion which might have taken place and did not, but I will see that the point receives as full consideration as if that discussion had taken place. The hon. Member also asked me to look at the point of protection afforded in the old Section 246(2). I shall be glad to do that at the same time. It may be

that there are further arguments, having regard to what he said. The hon. Member for Orpington (Mr. Lubbock) also raised the point and I will look into it.
The hon. Member for Orpington said that he was less dissatisfied with the Clause now than he had been hitherto, but he wanted to be reassured, in a way in which speeches at the Dispatch Box cannot reassure him, that the Clause will be worked satisfactorily. My appearances at the Box are attempts at explanation. They have not in any way the force of law, but I assure the hon. Member that we shall see that the very thing which he wants is carried out. We shall see that the same knowledge and expertise now brought to bear by the special commissioners will be brought to bear by the inspectors of taxes, so that the taxpayer will have the best possible audience for his comments as well as the added convenience of getting to the Inland Revenue official without a lot of trouble.
9.30 p.m.
Of course, the way that is done, as he probably knows, is that there is a blue book or a brown book—I do not know which colour—distributed among all inspectors of taxes which contains the essence of the practice and wisdom which has been gained in any way. I shall make sure that the wisdom and expert knowledge of the special commissioners dealing with the Surtax direction is fully distributed to all inspectors dealing with the matter so that we shall have, as far as possible, the informed and consistent treatment which is what we all desire.
I do not know whether the right hon. and learned Member for Chertsey (Sir L. Heald) wanted me to reply to the point which he raised. I think that the best answer was given by his right hon. Friend the Member for Altrincham and Sale (Mr. Barber). The right hon. and learned Gentleman said that there were a lot of changes and these were entirely due to what the Opposition had forced upon the Government and in no sense was it a matter of our generosity. The right hon. Member for Altrincham and Sale made a more accurate point, if I may say so, saying that there was really no change at all in any of these Amendments; it was merely presentation. I quite agree. The right hon. Gentleman has done his homework carefully, as usual. But in the


sense that it has helped towards an understanding of the purposes of the Government in the Clause, this is to be welcomed.
The hon. Member for Rutland and Stamford (Mr. Kenneth Lewis) asked me about a profit-sharing scheme. I gather from what he said that there were bonuses issued which would be taken in shares, in a sense, but these bonuses would be a charge against the profits of the company. All I can say is that 60 per cent. of profits reduced by those bonuses is a smaller figure than 60 per cent. before being so reduced, so he need have no anxiety on that score.
The hon. Member for Rutland and Stamford was anxious for the Government to encourage the growth of small companies. This is the Government's policy. We have every desire to encourage the growth of small companies and big companies. We want to encourage every company to become more and more efficient by using its resources and not sitting idly on them. That is the purpose of the Clause, which I hope that the Committee will now allow to pass.

Mr. Barber: We have had a fairly full discussion on several aspects of the Clause before coming to this Question, and I shall, therefore, try to be brief and to the point in my remarks. The whole Committee is grateful to the Chief Secretary for the patient way in which he has answered the several points raised during the debate or, in those cases where he was not sure of the answer, for promising to look into the matter between now and Report.
This is one of the most important Clauses of the Bill. It must be recognised that the Clause is not a mere by-product of the scheme of Corporation Tax which has been introduced. I say this because the Chief Secretary, at the outset of his reply, dealt in general terms with some of the principles of the Corporation Tax. The point to be recognised here is that, in this particular system, dealing with close companies, the Chancellor is breaking new ground, establishing new principles which are not an intrinsic part of the concept of a Corporation Tax.
Whether the Chancellor is right or wrong, the incontrovertible fact is that,

taking the scheme for close companies as a whole, the right hon. Gentleman is seeking to extend the Inland Revenue's control of what the Economist termed last week the great majority of British companies. I say this advisedly. By virtue of the extended definition of close company, a wider definition than what we have understood as the old Section 245 company, the Economist is right in saying that, in future the great majority of British companies will now come within the ambit of these stringent and far-reaching provisions.
I want to make one thing clear. I see the necessity with certain types of company under the control of a limited number of people for some special legislation to prevent the avoidance of tax. I think that few, if any, of my hon. Friends will disagree with me. Therefore, it seems to me that the central issue in the debate on this Clause is whether the Clause sets about it the right way to deal with this matter.
We are now considering Clause 72, which is essential to the whole concept of the scheme for dealing with close companies. It is impossible to consider the Clause in isolation, without regard to the types of company on which it will bite and the extent to which it will bite on them. As the Bill is at present drafted—I have in mind particularly Schedule 17—the Clause is to apply to innumerable companies which never came within the ambit of the original Surtax directions under the present law. Secondly, Corporation Tax is to be levied at a uniform rate of 35 or 40 per cent., unlike the majority of foreign countries with Corporation Tax which at present have a lower rate in respect of distributions or are moving in that direction.
Thirdly—this is of great importance—where under the old system a Surtax direction was made there was no liability to Profits Tax. Under the Chancellor's new system the 60 per cent. in the ceiling case which is now to be taxed as personal income will in addition be liable to Corporation Tax. These are very important differences which must have a bearing on our approach to the Clause.
The whole scheme for dealing with close companies as set out in the Bill has rightly drawn protests from many people who have experience of industry and


commerce. The reason is not difficult to see. It is because the scheme, when considered in its entirety, will I believe inevitably hamper the growth and the improving efficiency of thousands of companies on which our prosperity depends.
The only material alterations proposed by the Chancellor since the Bill was published are, first, the removal of the £25,000 limit on directors' remuneration, which we proposed, and, secondly, the provision for a clearance procedure, which we also proposed. But the criterion of 60 per cent. distribution still remains, the onus of proof, whatever view one takes on the merits, still remains on the taxpayer and the enlarged definition of a close company still remains.
In short, it can be said that the Chancellor has failed to meet the major criticisms made. It is not surprising, because those Ministers who are primarily responsible for our industrial and economic destinies simply do not understand the consequence of what they are doing, and, what is more important, I believe they do not understand the sensible approach of some of those who have made representations about the Clause.
I noticed that the Minister of State for Economic Affairs said the other day:
We are used to attacks and we ought to be prepared to receive them, but we do really expect serious bodies, like chambers of commerce, professional bodies and institutes of

directors, to behave with a little more rationality than with the hysterics that some of them have been displaying."

That seems to me to be extraordinarily arrogant. After all, who is the Minister of State to talk about chambers of commerce and professional bodies behaving with hysterics? These are the very organisations which have been making representations about the Clause, but perhaps it is not surprising that the Minister of State took that view because it was he who, when my right hon. Friend the Member for Bexley (Mr. Heath) was talking about the break up of family businesses, interjected, "and about time".

There is much more that I could have said about the Clause. In due course we shall have an opportunity to debate the definition on close companies. Many public companies have now been brought into the net and these provisions will, in relation to those companies, be quite impracticable and inappropriate. It is because these provisions penalise the small family business and are inappropriate for the larger public companies that we shall vote against the Clause. My hon. Friend the Member for Barry (Mr. Gower) said that he will leave the Clause reluctantly. I only wish that I could say the same.

Question put, That the Clause, as amended, stand part of the Bill:—

The Committee divided: Ayes 188, Noes 165.

Division No. 191.]
AYES
[9.41 p.m.


Abse, Leo
Coleman, Donald
George, Lady Megan Lloyd


Allaun, Frank (Salford, E.)
Conlan, Bernard
Ginsburg, David


Alldritt, Walter
Corbet, Mrs. Freda
Greenwood, Rt. Hn. Anthony


Armstrong, Ernest
Craddock, George (Bradford, S.)
Gregory, Arnold


Atkinson, Norman
Crossman, Rt. Hn. R. H. S.
Griffiths, David (Rother Valley)


Bacon, Miss Alice
Cullen, Mrs. Alice
Griffiths, Rt. Hn. James (Llanelly)


Bagier, Gordon A. T.
Dalyell, Tam
Grimond, Rt. Hn. J.


Barnett, Joel
Davies, G. Elfed (Rhondda, E.)
Hale, Leslie


Beaney, Alan
Davies, Ifor (Gower)
Hamilton, James (Bothwell)


Benn, Rt. Hn. Anthony Wedgwood
Davies, S. O. (Merthyr)
Hamilton, William (West Fife)


Bennett, J. (Glasgow, Bridgeton)
Diamond, John
Hannan, William


Bessell, Peter
Doig, Peter
Harrison, Walter (Wakefield)


Bishop, E. S.
Donnelly, Desmond
Hart, Mrs. Judith


Blackburn, F.
Duffy, Dr. A. E. P.
Hattersley, Roy


Blenkinsop, Arthur
Dunn, James A.
Herbison, Rt. Hn. Margaret


Boardman, H
Edwards, Rt. Hn. Ness (Caerphilly)
Hill, J. (Midlothian)


Bowden, Rt. Hn. W. (Leics S. W.)
Ennals, David
Hobden, Dennis (Brighton, K'town.)


Bowen, Roderic (Cardigan)
Ensor, David
Holman, Percy


Boyden, James
Fernyhough, E.
Hooson, H. E.


Braddock, Mrs. E. M.
Fitch, Alan (Wigan)
Horner, John


Bray, Dr. Jeremy
Fletcher, Sir Eric (Islington, E.)
Houghton, Rt. Hn. Douglas


Broughton, Dr. A. D. D.
Fletcher, Ted (Darlington)
Howie, W.


Buchan, Norman (Renfrewshire, W.)
Fletcher, Raymond (Ilkeston)
Hoy, James


Buchanan, Richard
Floud, Bernard
Hughes, Emrys (S. Ayrshire)


Butler, Herbert (Hackney, C.)
Foley, Maurice
Hughes, Hector (Aberdeen, N.)


Callaghan, Rt. Hn. James
Fraser, Rt. Hn. Tom (Hamilton)
Hunter, Adam (Dunfermline)


Carmichael, Neil
Freeson, Reginald
Hunter, A. E. (Feltham)


Carter-Jones, Lewis
Galpern, Sir Myer
Irving, Sydney (Dartford)


Castle, Rt. Hn. Barbara
Garrett, W. E.
Jay, Rt. Hn. Douglas




Johnston, Russell (Inverness)
Neal, Harold
Small, William


Jones, Dan (Burnley)
Newens, Stan
Smith, Ellis (Stoke, S.)


Kelley, Richard
Oakes, Gordon
Soskice, Rt. Hn. Sir Frank


Kenyon, Clifford
Ogden, Eric
Steel, David (Roxburgh)


Langford-Holt, Sir John
O'Malley, Brian
Steele, Thomas (Dunbartonshire, W.)


Lawson, George
Oram, Albert E. (E. Ham, S.)
Stewart, Rt. Hn. Michael


Lee, Rt. Hn. Frederick (Newton)
Orme, Stanley
Stones, William


Lever, L. M. (Ardwick)
Oswald, Thomas
Summerskill, Hn. Dr. Shirley


Lewis, Arthur (West Ham, N.)
Owen, Will
Swingler, Stephen


Lewis, Ron (Carlisle)
Padley, Walter
Symonds, J. B.


Lomas, Kenneth
Park, Trevor (Derbyshire, S.E.)
Taylor, Bernard (Mansfield)


Loughlin, Charles
Parker, John
Thomson, George (Dundee, E.)


Lubbock, Eric
Pearson, Arthur (Pontypridd)
Thornton, Ernest


McBride, Neil
Peart, Rt. Hn. Fred
Thorpe, Jeremy


McCann, J.
Pentland, Norman
Tinn, James


MacDermot, Niall
Perry, Ernest G.
Tomney, Frank


McGuire, Milchael
Popplewell, Ernest
Urwin, T. W.


McInnes, James
Price, J. T. (Westhoughton)
Varley, Eric G.


McKay, Mrs. Margaret
Probert, Arthur
Wainwright, Edwin


Mackenzie, Alasdair (Ross &amp; Crom'ty)
Pursey, Cmdr. Harry
Walden, Brian (All Saints)


Mackenzie, Gregor (Rutherglen)
Randall, Harry
Wallace, George


McLeavy, Frank
Rankin, John
White, Mrs. Eirene


MacMillan, Malcolm
Rees, Merlyn
Whitlock, William


Mahon, Simon (Bootle)
Rhodes, Geoffrey
Wigg, Rt. Hn. George


Manuel, Archie
Richard, Ivor
Wilkins, W. A.


Mapp, Charles
Roberts, Albert (Normanton)
Willey, Rt. Hn. Frederick


Mason, Roy
Robertson, John (Paisley)
Williams, Clifford (Abertillery)


Maxwell, Robert
Rodgers, William (Stockton)
Willis, George (Edinburgh, E.)


Mendelson, J. J.
Rogers, George (Kensington, N.)
Winterbottom, R. E.


Millan, Bruce
Sheldon, Robert
Wyatt, Woodrow


Miller, Dr. M. S.
Shinwell, Rt. Hn. E.
Yates, Victor (Ladywood)


Milne, Edward (Blyth)
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)



Molloy, William
Silkin, John (Deptford)
TELLERS FOR THE NOES:


Morris, John (Aberavon)
Slater, Mrs. Harriet (Stoke, N.)
Mr. Harry Gourlay and


Murray, Albert
Slater, Joseph (Sedgefield)
Mr. Joseph Harper.




NOES


Agnew, Commander Sir Peter
Errington, Sir Eric
Lloyd, Ian (P'tsm'th, Langstone)


Alison, Michael (Barkston Ash)
Eyre, Reginald
Lloyd, Rt. Hn. Selwyn (Wirral)


Allason, James (Hemel Hempstead)
Farr, John
Longden, Gilbert


Astor, John
Fisher, Nigel
McAdden, Sir Stephen


Awdry, Daniel
Fletcher-Cooke, Sir John (S'pton)
McLaren, Martin


Barber, Rt. Hn. Anthony
Foster, Sir John
McMaster, Stanley


Barlow, Sir John
Fraser, Ian (Plymouth, Sutton)
McNair-Wilson, Patrick


Batsford, Brian
Gammans, Lady
Maitland, Sir John


Bell, Ronald
Giles, Rear-Admiral Morgan
Mathew, Robert


Bennett, Sir Frederic (Torquay)
Glover, Sir Douglas
Maude, Angus


Berkeley, Humphry
Godber, Rt. Hn. J. B.
Maudling, Rt. Hn, Reginald


Biggs-Davison, John
Goodhew, Victor
Mawby, Ray


Birch, Rt. Hn. Nigel
Gower, Raymond
Maxwell-Hyslop, R. J.


Black, Sir Cyril
Grant, Anthony
Maydon, Lt.-Cmdr. S. L. C.


Bossom, Hn. Clive
Grieve, Percy
Meyer, Sir Anthony


Box, Donald
Griffiths, Peter (Smethwick)
Mills, Peter (Torrington)


Boyd-Carpenter, Rt. Hn. J.
Gurden, Harold
Mills, Stratton (Belfast, N.)


Boyle, Rt. Hn. Sir Edward
Hall-Davis, A. G. F.
Mitchell, David


Brewis, John
Hamilton, M. (Salisbury)
Monro, Hector


Brinton, Sir Tatton
Harris, Frederic (Croydon, N.W.)
More, Jasper


Brown, Sir Edward (Bath)
Harris, Reader (Heston)
Morrison, Charles (Devizes)


Bruce-Gardyne, J.
Harvey, John (Walthamstow, E.)
Mott-Radclyffe, Sir Charles


Bullus, Sir Eric
Harvie Anderson, Miss
Munro-Lucas-Tooth, Sir Hugh


Burden, F. A.
Hawkins, Paul
Murton, Oscar


Buxton, Ronald
Heald, Rt. Hn. Sir Lionel
Noble, Rt. Hn. Michael


Chataway, Christopher
Heath, Rt. Hn. Edward
Nugent, Rt. Hn. Sir Richard


Chichester-Clark, R.
Higgins, Terence L.
Osborn, John (Hallam)


Clark, William (Nottingham, S.)
Hill, J. E. B. (S. Norfolk)
Page, R. Graham (Crosby)


Clarke, Brig. Terence (Portsmth, W.)
Hobson, Rt. Hn. Sir John
Pearson, Sir Frank (Clitheroe)


Cole, Norman
Hornsby-Smith, Rt. Hn. Dame P.
Peel, John


Cooke, Robert
Howard, Hn. G. R. (St. Ives)
Percival, Ian


Cooper-Key, Sir Neill
Hunt, John (Bromley)
Peyton, John


Cordle, John
Hutchison, Michael Clark
Pickthorn, Rt. Hn. Sir Kenneth


Costain, A. P.
Irvine, Bryant Godman (Rye)
Pike, Miss Mervyn


Courtney, Cdr. Anthony
Jenkin, Patrick (Woodford)
Pitt, Dame Edith


Craddock, Sir Beresford (Spelthorne)
Jennings, J. C.
Pounder, Rafton


Crosthwaite-Eyre, Col. Sir Oliver
Johnson Smith, G. (East Grinstead)
Powell, Rt. Hn. J. Enoch


Curran, Charles
Kaberry, Sir Donald
Prior, J. M. L.


Dalkeith, Earl of
Kerr, Sir Hamilton (Cambridge)
Pym, Francis


Davies, Dr. Wyndham (Perry Barr)
Kershaw, Anthony
Ramsden, Rt. Hn. James


d'Avigdor-Goldsmid, Sir Henry
King, Evelyn (Dorset, S.)
Rawlinson, Rt. Hn. Sir Peter


Dean, Paul
Kirk, Peter
Renton, Rt. Hn. Sir David


Digby, Simon Wingfield
Langford-Holt, Sir John
Ridley, Hn. Nicholas


Dodds-Parker, Douglas
Legge-Bourke, Sir Harry
Ridsdale, Julian


Elliott, R. W.(N'c'tle-upon-Tyne, N.)
Lewis, Kenneth (Rutland)
Roberts, Sir Peter (Heeley)


Emery, Peter
Litchfield, Capt. John
Robson Brown, Sir William







Roots, William
Teeling, Sir William
Weatherill, Bernard


Scott-Hopkins, James
Temple, John M.
Webster, David


Sharples, Richard
Thomas, Rt. Hn. Peter (Conway)
Whitelaw, William


Sinclair, Sir George
Turton, Rt. Hn. R. H.
Wills, Sir Gerald (Bridgwater)


Spearman, Sir Alexander
van Straubenzee, W. R.
Wilson, Geoffrey (Truro)


Stanley, Hn. Richard
Walder, David (High Peak)
Woodhouse, Hon. Christopher


Stoddart-Scott, Col. Sir Malcolm
Walker, Peter (Worcester)
Younger, Hn. George


Studholme, Sir Henry
Walker-Smith, Rt. Hn. Sir Derek



Talbot, John E.
Wall, Patrick
TELLERS FOR THE NOES:


Taylor, Edward M. (G'gow, Cathcart)
Ward, Dame Irene
Mr. Ian MacArthur and




Mr. Dudley Smith.

Clause 73.—(APPORTIONMENT FOR SURTAX OF CLOSE COMPANY'S INCOME.)

Sir Eric Fletcher: I beg to move Amendment No. 691, in page 94, line 47, at the end to insert:
but with such reduction, if any, as may be just in respect of distributions made for the period to persons other than participators and associates of participators (or amounts treated as such for purposes of section 72 above):".

The Chairman: With Amendment No. 691 we may take Amendment No. 692, in page 95, leave out lines 12 to 17.

Sir Eric Fletcher: These two Amendments are interrelated. They are very little more than drafting Amendments. In effect, the proviso to subsection (4) in the Bill as printed is deleted and the operative words are transposed as part of subsection (2). The object of the proviso was to ensure that the participators of a close company are not themselves charged for Surtax by reason of the payment of excess remuneration, which would be disallowed under Clause 69, to a director who is not a participator. It is more convenient and more favourable if the proviso forms part of subsection (2) rather than a proviso to subsection (4).

Mr. Patrick Jenkin: It must be a novel case when the word "just" is introduced in such a context as this, in a taxing Statute. It used to be said in relation to the equity as administered in the Courts of Chancery that the equity would vary with the length of the Lord Chancellor's foot. We now seem to have this concept transposed into the taxing Statute where the assessment seems to vary with the weight of the Minister's fortfolio. [HON. MEMBERS: "He has not got one."] If he had one.
I would have thought that in relation to taxation one wants to keep the element of discretion on the part of the inspectors of taxes down to the absolute minimum. We have already discussed the transference of the whole of this function of making directions on close companies

from the special commissioners to the inspectors. Now we are giving them a very wide discretion in these words that are transposed from the proviso to sub-Clause 4 in relation to the amount that shall be disallowed in respect of directors' remuneration. I would have thought that this was not a very good thing to rule.
It has often been said that there is no equity in the taxing statutes and that there should be as little room as possible for exercise of the individual discretion of the inspector when it is written in a Statute of this sort. The Statute should try to lay down what is to be regarded as just. It is what Parliament feels and not what the inspector feels is just which should be the test in levying taxes.

Sir Eric Fletcher: I do not dissent in general from the hon. Gentleman's observations. It is right that we should reduce to a minimum the occasions on which an element of discretion is left to the inspector.
It is not correct, as the hon. Gentleman suggested, that this is a novel provision. It is not unique. There is precedent for it. In this case, this is the only solution, I think, which could be found. The Amendment is designed to substitute this provision in a part of the Clause more favourable to the taxpayer than it would be if it were left in subsection (4). The object of the Amendment is to ensure that there will be excluded from any liability on any part of the profits which would otherwise be subject to Surtax that part of the profits which are represented by an excess distribution to a director.
I have given this matter very considerable thought, and it seems to me completely impossible, without a very elaborate provision, to do more than leave the operation of this part of the Bill to the discretion of the inspector of taxes.

Amendment agreed to.

Further Amendments made: In page 95, line 3, leave out "or (5)". In page 95, leave out lines 12 to 17.—[Sir Eric Fletcher.]

Sir Eric Fletcher: I beg to move Amendment No. 723, in page 95, line 43, to leave out from "and" to "amounts" in line 44 and insert:
no individual shall be charged to surtax by virtue of any apportionment under this section unless the sum or (where there is a sub-apportionment) aggregate sum on which he is so chargeable".
Although Amendment No. 630—in line 36, to leave out "subsection (3) above" and to insert "this section"—has not been selected, those who tabled it will have realised that Amendment No. 723 is designed to give effect to it. I should like to pay tribute for the fact that the point which the hon. Members in question intended to give effect to is a good point which has not escaped the attention of my right hon. and hon. Friends. This Amendment will serve in somewhat different language to give effect to what they were contemplating.

Mr. van Straubenzee: My hon. Friends and I are grateful for one more of the long line of compliments from the occupants of the Government Front Bench for the improvements in drafting which are consequential on the very careful and detailed examination which we on this side of the Committee have given to the Bill. I should be churlish if I did not acknowledge that the Government have met the point which clearly they had not appreciated until Amendment No. 630 was tabled.
I am still of the view that the drafting of our Amendment is tidier than that of the Government's Amendment, but I do not want, at this hour, to hold up our proceedings, apart from expressing my appreciation to the Government for meeting the point.

Mr. Barber: If at any time my hon. Friends can be of further assistance, the Minister without Portfolio has only to let us know.

Amendment agreed to.

Clause, as amended, ordered to stand part of the Bill.

Clause 74.—(SUPPLEMENTARY PROVI- SIONS ABOUT CLOSE COMPANIES.)

10.0 p.m.

Mr. Patrick Jenkin: I beg to move Amendment No. 631, in page 96, line 28, at the end to add:
(2) A company may in respect of any financial year during the whole of which it is a close company elect by notice in writing to the Inspector within two years of the end of such financial year that it shall be assessed to income tax as though it were a partnership consisting of its participators and directors and that it shall be exempt from corporation tax for that financial year and in such circumstances the company's income shall be deemed to accrue to its participators and directors as partners in such shares as may be just having due regard to their rights to participate in the income of the company or to remuneration from the company.
I should like to begin by thanking you, Dr. King, for having decided to select this Amendment. I feel certain that, when you have heard the arguments in its favour, you will appreciate that this is a point of considerable substance. I hope that the Treasury Bench will give the argument on this Amendment the same very close consideration to which we have by now become accustomed in relation to other Amendments with which we have been dealing.
The purpose of the Amendment is to give close companies the option to be assessed as partnerships. That is to say, where it would pay them to do it, close companies should not be liable for Corporation Tax but should be liable to Income Tax and Surtax on the whole of the income of the business, with no provision for retentions, The purpose which underlies the Amendment is to avoid the very severe tax penalty which the mere fact of incorporation will now impose on the smaller companies. I am sure that the Committee by now realises—even if the Chancellor does not—that the tax changes which the Bill introduces for separating companies from their shareholders and imposing compulsory distributions on certain companies can impose very heavy burdens on very small companies.
This can be done to the point—as was said in an earlier debate—at which the owners of the company could be substantially worse off by trading as a company rather than by trading as a one-man company alone or trading in partnership.


The pattern of this is not difficult to comprehend, and, I hope, not too difficult to explain. The point is that, as soon as the profits of a very small company exceed the amount which can be paid as directors' remuneration, Corporation Tax becomes payable. At that point, of course, more tax is paid by the business than would be paid if the man were trading as an unincorporated trader, if he were trading on his own, because he is paying Corporation Tax and, of course, personal Income Tax on his director's remuneration.
As the profits rise, so does the disparity increase, until the point is reached at which the profits are so high that Surtax would be payable in the case of a one-man trader at the highest rates and would, therefore, equal or more than equal the Corporation Tax which would be paid if he were trading as a company. Thereafter, the disadvantage begins to decline, until so much Surtax would be paid that it would be cheaper to incorporate and trade as a company.
At the risk of wearying the Committee, I should like to mention one or two figures on this, because they are striking. For these figures I shall assume a 40 per cent. Corporation Tax and 60 per cent. distributions. I entirely take the point that, if the distribution is less, the disparity may well be less. I take the case of a sole shareholder for the sake of simplicity. I am assuming a married man with two children under 11 with no other income and no other allowances.
In this case, the maximum allowable director's remuneration is £3,500, the Government having refused an Amendment which would have increased this. The 15 per cent. provision does not apply, because these are very small companies, in relation to which what the Chief Secretary referred to as the minimum figure comes in.
If the profits of the business are no more than £3,500, and the director pays the whole of the profits to himself as remuneration, the profits assessable to Corporation Tax are nil and, therefore, there would be no difference whether it is a company or he is trading alone. If, however, the profits rise to £5,000, as a company the combined tax of the company and the individual would be £1,444, compared with the tax on a sole trader

of £1,371. We must, however, also take into account the potential Capital Gains Tax liability because of the retentions, amounting to another £207, leaving a adverse balance in the case of the company of £343.
If the profit goes up to £10,000, the combined tax of the company and the individual is £4,495, whereas with a sole trader it is only £4,027. If we add to that the potential Capital Gains Tax liability on the retentions, which comes to another £652, the disparity is over £1,000, or £1,120 to be exact. Thereafter the figure begins to decline again. For the moment, I am talking of one-man businesses.
With profits of £15,000, the tax would be £7,796 for an incorporated company but £7,294 for a sole trader unincorporated. To that must be added the potential Capital Gains Tax on the retentions, amounting to £906, which still leaves an adverse balance for an incorporated company of £778.
The picture is fairly clear of two rising curves which cross over as soon as Corporation Tax begins to be paid by the business and which then diverge, the gap getting wider and wider and then becoming narrower again until the two lines once more cross over. In the case of the one-man business this occurs probably between £15,000 and £20,000 or at a correspondingly higher figure when there are more participators in the business.
At these levels, therefore, which on the whole are the levels of the smaller close companies, there is a distinct and major disadvantage in being incorporated. In short, incorporation is a luxury which these businessmen would be unable to afford. It must, however, be borne in mind that the limited liability company has been what might be called the springboard from which a great deal of the country's enterprise has come. The limited liability company was itself a product of the nation's genius for organisation. We led the world in the organisation of commercial enterprise with the development of the principle of the limited liability company. I maintain that this substantial tax disadvantage should not be regarded as a price to pay for the benefits of incorporation. After all, these companies pay capital duty when they are formed; they have to


comply with the stringent provisions of the Companies Acts, filing their annual returns, preparing their accounts in the appropriate way, and so on. Why should this apply only to the smaller companies? Why should they be the only ones which have to pay this price for incorporation?
There are many benefits of incorporation which are of real value. The most important of these is the benefit of limited liability which can ensure that a businessman who wants to exploit an idea or who wants to get into a trade in which he can expand or afford to take risks can keep his own private house and fortune safe from the risks of being attacked by creditors. If he tries his hand as a limited company, only what he puts into the business is available to satisfy his creditors. This method provides a springboard for enterprise which is of immense value.
This method has administrative advantages. It provides for continuity of the business in case of change of ownership; the shares can be sold and the business can continue. It allows for flexibility and great simplicity of administration. I maintain that this is intensely precious and that we must consider it extremely closely when imposing substantial additional tax penalties on small businesses.
My Amendment is designed to give these businesses the option of being treated as partnerships and to be taxed as such, with the partners paying full Income Tax and Surtax on the partnership income if they so wish. This is not a novel suggestion. A provision of this sort applies in other countries which have or have had the same sort of pattern of taxation as the Chancellor is introducing.
We have heard a lot about how the Americans have had a corporation tax along these lines, but they have had this partnership provision, or something like it, for years. Thus, Her Majesty's Government cannot continue to justify introducing a tax system on these lines, based on American experience, unless they import the American reliefs. It has been said from this side of the Committee that the rates between the two countries are quite different, particularly of the Capital Gains Tax.
The Amendment represents an essential provision to protect small businesses from undue tax penalties. Such protection is to be found in the American system and we should adopt and import it into the new scheme of things here. The American provisions relate to small businesses or corporations with 10 or fewer shareholders who are all United States residents. They are to be found in the Internal Revenue Code, Sections 137(1) to 137(7).
We have been told that France had a corporation tax on the same pattern, although they have had the good sense to move away from it. The French, too, had a similar provision relating to small businesses, particularly family concerns. Families could elect to be treated as individual unincorporated businesses. Conversely, the French had an interesting provision whereby partnerships could elect to be treated as companies.
I suggest, therefore, that in the absence of a provision such as that contained in the Amendment, well advised companies may contemplate disbanding their companies—and there is an Amendment down later on this point—and turning themselves into partnerships. I would indeed regard that as a retrograde step. It would be a strange result of a Bill which seems to be so preoccupied with the problem of tax avoidance if it drove many small businesses, in self-defence, to taking that sort of avoidance action, particularly after the Chancellor has spent so much time decrying the activities of those who are engaged in this sort of tax planning.
This is a fair, reasonable and necessary Amendment. I concede that it may not be cast in the precise form in which the Government might like to see it in the Bill. If they are prepared to accept the principle and undertake to introduce a suitable Amendment on Report, I will willingly withdraw it. If not, thousands of small, and not so small, businesses will, I fear, take themselves out of the Companies Act and become partnerships, with all the risks, inconvenience and difficulties that that will undoubtedly entail.
I am sure that the Minister will find this an eminently acceptable Amendment, if not in terms of the words it contains then in terms of the principle involved.

10.15 p.m.

Sir Eric Fletcher: The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) generally makes a reasonable and rational speech, but on this occasion I cannot congratulate him—[HON. MEMBERS: "Oh."] I am sure that a few minutes' reflection will show that his Amendment cannot possibly be justified either on principle or in practice. It is based on a number of fallacies. It asks in terms that a close company can be treated as a close company or a partnership. Obviously, it cannot have it both ways.
The hon. Member then says that there are various benefits of incorporation. Incorporation is, of course, a privilege. It confers advantages. It limits the liabilities of those who incorporate themselves. And it cannot be said that it is always to the public interest that one man should carry on his trade as a company. Nor is it always to the public interest that two people trading together should incorporate themselves rather than carry on their trade in partnership. A great many persons still prefer to trade in partnership rather than as an incorporation. The hon. Member for Wokingham (Mr. van Straubenzee), who is a member of my profession, is familiar with those of us who are compelled by law to carry on our profession in partnership, whether or not we would wish to be incorporated.
As it is, any person carrying on any trade has the option of deciding whether it is to his advantage to trade as an individual or as a company. Two persons trading together have the option of deciding whether it is to their advantage to trade as a partnership or to incorporate themselves. It is perfectly true that in the past a great many persons have formed themselves into companies because of tax advantages in doing so. It may well be the case that with the transfer of Profits Tax and Income Tax to the Corporation Tax structure it does not become equally advantageous for a trader to incorporate himself into a company until the range of profits has reached a different level, but it cannot be argued that persons who have the choice of trading either in partnership or as an incorporated company should also have the opportunity of deciding whether it suits them better to be taxed on a part-

nership or a company basis. One cannot possibly claim for individuals the right to choose to be taxed on a basis of, "heads I win and tails you lose".
I am not concerned here with what is done in America or France—[HON. MEMBERS: "Oh."] I am concerned here to say that, on principle, it does not seem to us to be right or equitable that a taxpayer should have that privilege. Nor does it seem sensible that he should have the option of making a decision every year. Apart from the objections on principle, I am sure that the Committee will realise that the administrative inconvenience that would result would be excessive in the extreme.
One has only to imagine the difficulties that would arise if a company, having been taxed on a Corporation Tax basis, after an interval of two years, said that it wanted to be taxed as if it were a partnership. The result would be that the computations would have to be reopened. The liabilities of both the company and the participators would have to be reopened. The company would be entitled to the repayment of Corporation Tax, and there would be further tax due from the participators on the basis of the company's income as spread among them in appropriate shares. There would be enormous complications of liability. It would postpone the date on which there was any finality on the tax liability of the concern. It would give the inspectors of taxes—who, in the circumstances, will have enough to do—a very considerable increase in work.
For those reasons, I must advise the Committee to reject the Amendment.

Mr. Stratton Mills: The Minister without Portfolio has given three main reasons why he cannot accept this Amendment. First, he said that the trader "can't have it both ways". My hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) admitted that it would not be realistic to expect companies to job backwards and forwards from one category to another each year. I am certain that my hon. Friend would be very flexible if the Government were to try to draft an Amendment to meet such an eventuality. This proposal would help largely the small trader. My hon. Friend's figures


showed the extremely arbitrary way in which the graph affects tax liability.
The second point which the Minister mentioned was the argument about the privilege of being incorporated. If the United States is able to make this kind of provision in its company taxation law, I cannot understand why the proposal should be so difficult here. In the United States this partnership often exists for the "small business corporation" where there are not more than 10 shareholders all of whom are resident individuals.
These corporations are exempt from corporation tax but the whole of the undistributed profit is deemed to be distributed to shareholders and there are corresponding arrangements for loss. The corporation tax in the United States of America is imposed at only 26 per cent. on the first 25,000 dollars of profits and 48 per cent. on the excess. The hon. Gentleman has not answered the point, if in the United States of America it is possible to do this, why is it impossible in Britain?

Mr. Lubbock: I am not familiar with the American tax legislation and I should be grateful if the hon. Member would clarify a point. He mentioned that small business corporations were companies in which there were fewer than 10 participators and that their profits were exempt from tax when they were resident individuals. Is he not, therefore, saying that in the United States a small business is taxed as a close company anyway?

Mr. Stratton Mills: I understand that there is the option and that the company is entitled to have the option of whatever method it thinks the most attractive form.
The third point which the Minister made great play with was that the administrative inconvenience would be immense if this system were used. I come back to the point that if it can be done by the United States of America, why cannot it be done by the Inland Revenue here? An equally important point is that, of course, it would create problems for the trading community which would suffer from delays if it were to job continually backwards and forwards from one system to another. It would have to be approached from a responsible attitude.
I hope that the hon. Gentleman will think again on these three arguments,

which struck me as considerably unconvincing.

Mr. van Straubenzee: I do not think the Committee has had the convincing arguments from the Minister without Portfolio to which we have been very glad to become accustomed for some time. Like my hon. Friends, I am absolutely certain that the argument he regarded as conclusive was the one that he produced at the end of his speech, administrative convenience—the last hide-out and resting place of a Minister driven from position to position and briefed by officials who wince when they consider what might be convenient if a provision like this were incorporated in the Bill. I can understand that the provision is in a simple form.
My hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) was at pains to make it clear that, after reconsideration, the Government may well feel that the option date would need to be irrevocable for a period of time. There is a roughly analogous provision in the German law. The election is irrevocable for a period of five years. I do not try to draw the exact parallel, but the Minister without Portfolio will know that the German law works on the basis of encouraging the distribution of profits and then the company concerned goes to the capital market for the moneys needed for expansion. Private companies 76 per cent. owned by individuals with a certain limit, which is approximately £500,000 in our currency, are subject to special treatment. They are subject to special treatment on the ground that they must necessarily grow by retentions, which is a principle which I had hoped that we should have seen more of here.
My hon. Friend the Member for Wanstead and Woodford referred to the provisions of the French law. I will not got into them again. In preparing ourselves to present this argument to the Committee, we looked with care at the provisions of the law of other countries. If we put it in shorthand to the Minister tonight, it is only because we do not want to delay the discussion unreasonably.
In return, we are entitled to a properly argued rebuttal and not merely refuge in


the splendid phrase, "administrative convenience". The case made by my hon. Friends the Members for Wanstead and Woodford and Belfast, North (Mr. Stratton Mills) was very strong. At minimum, the Minister without Portfolio can reasonably be asked to reply that he understands that the provisions of the Bill, so far as we have discussed it, make very sharp tax discrimination against those who trade in this form and that he recognises that a reasonable case has been made for some kind of option by election over a reasonable time. I do not think that we have had the type of answer to which the Committee is reasonably entitled.

Sir D. Glover: I think that the Minister without Portfolio has made a most unconvincing answer to this argument. I shall not reiterate the arguments which have already been advanced, because I believe that they are beyond challenge. I want to put the case the other way round. The Chancellor and his colleagues have said all through the debates that the whole basis of the Bill is to increase efficiency and competition. Everybody in the Committee who has any knowledge of small businesses will know that a partnership, or an individual running a business where he has his own home at risk, his insurance policy at risk, and everything he possesses at risk, once he rises beyond a certain point becomes very much more cautious. At that point of time he likes to form himself into a limited company. If the business is owned by two partners, they both do, because they probably have ideas of expansion, but they do not want to put all their property at risk by so doing.
So, before entering on their expansion campaign—I am dealing now with small companies—having consulted their suppliers and everybody else they form themselves into a limited liability company, because then the risk is limited. Although they are to expand, although they are to take what would normally be regarded as a normal trading risk, they have moved out of the orbit of their own private homes the one thing that protects their wives and children.
Because of the Bill, they will not take that step of incorporation. They will not take that step of expansion, because they

realise that probably for the next five years it will not be to their advantage. I hope that the Chancellor appreciates this point. If for the next five years it will not be to their advantage—either a one-man business or a two-man business—to change over to an incorporated company—

Mr. Barnett: The hon. Gentleman is talking about a small close company which wants to expand.

10.30 p.m.

Sir D. Glover: No, I am not.

Mr. Barnett: The hon. Gentleman is talking about a small close company which is growing—

Sir D. Glover: Sir D. Glover rose—

The Chairman: Order. If the hon. Gentleman gave way for an intervention he must let the intervention be made.

Sir D. Glover: I had heard sufficient of the intervention to know that the hon. Member did not know what the argument was about.

Mr. Barnett: Mr. Barnett rose—

Sir D. Glover: No, I will not give way. The hon. Member must sit down. I am not talking about a company which is incorporated. I am talking about two or three people who are trading in an unincorporated position. The point arises as to whether they should expand and, if they are going to expand, whether they should form themselves into a limited liability company. Under the provisions of this Bill their accountant may say, "I cannot advise you to do this immediately because if you do over the next three or four years you will pay more tax by incorporating yourselves than you would pay if you did not incorporate yourselves".

Mr. Barnett: Mr. Barnett rose—

Sir D. Glover: I am not going to give way again. If the hon. Gentleman wishes to make a speech he can do so afterwards. If my arguments are right, there is an advantage in not being incorporated at a certain size of the company—

Mr. Barnett: Would the hon. Gentleman allow me?

Sir D. Glover: No, the hon. Gentleman can make his speech later.

The Temporary Chairman (Mr. Grant-Ferris): Order. Unless the hon. Member for Ormskirk (Sir D. Glover) gives way, the hon. Member for Heywood and Royton (Mr. Barnett) must remain seated.

Sir D. Glover: with respect to you, Mr. Grant-Ferris, if the hon. Member wants to make a speech, he can do so afterwards. All he wants to do is to break down my argument.
If it is to the advantage of individual traders to go on trading in partnership or as individuals rather than forming themselves into a limited liability company, they will postpone the formation of themselves into a limited liability company probably for four or five years longer than would be the case if this Bill did not become law. That is the point of time in the existence of so many companies when a big expansion in the size of the company takes place. Two young men form themselves into a business. They take three or four years to learn the job and in getting the feeling that they are on top of the job. Then they realise that there is a great future in their activities. They are able to undercut a lot of their competitors. They see a great future in expansion. But if they expand, they will increase their liability to tax if they become a limited liability company, so that they decide not to undertake incorporation but to continue jollying along in a smaller form.
The Chancellor may say that this is a very good thing, that it reduces the drain and demand on the resources of the company. But I understood that in the long term the Chancellor wanted to provide a dynamic society whereby a young firm could grow as fast as it was able. Under this Clause the Chancellor is making it much more likely that the small firms will go on jollying along. Human beings being what they are, when it comes to incomes they are very shortsighted. Somebody seeing that his income will be £500 more in the next five years—I know the attitude of mind of that segment of the population—would say, "I would sooner have the £500 than risk the change that would come about by incorporation."

Mr. Lubbock: If the expansion of the business which the hon. Member has mentioned was such that the shareholders

or proprietors needed to plough back more than half their profits they would be better off under the Corporation Tax scheme than they were hitherto.

Sir D. Glover: I entirely agree with the hon. Member's intervention at a certain point of size, but we are dealing here with a lot of very small companies. These are people who are between the jobbing joiner and the man who makes furniture, or between the jobbing plumber and the man who puts in new fittings on a new housing estate. We are dealing with a small margin of companies which have the knowledge and can grow, and it is at that point that, in a dynamic society, they should become limited liability companies. The Chancellor now makes that much more unlikely.
I ask the Chancellor to look at this matter before Report. I am sure that the arguments of my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) on the side of the amount of taxation and giving people the right to be assessed either as a partnership or as a limited liability company are valid. But far more important is the point that many people who should become limited liability companies will remain partnerships and will not grow as a result of this Clause.

Mr. William Clark: I hesitated to rise because I thought that the Minister without Portfolio would speak and I wanted to know whether he could improve on his previous answer. The real question asked by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) was one of equity. All he said was that a small company just because it is a limited liability company should not be penalised any more than a small trader or traders in partnership. My hon. Friend gave effective figures to show that limited liability companies even now hold a penalty for the proprietor. He gave examples, starting from £3,500, and I was surprised that the Minister without Portfolio did not pull him up sharply and say that it would not be a 60 per cent. distribution. But if it is worked out at a 40 per cent. distribution, up to about £15,000 profit, the limited liability trader will be more heavily taxed than the private individual.
As some of my hon. Friends have said, this is not a question of creating a system


whereby people go jobbing backwards and forwards. My hon. Friend the Member for Wanstead and Woodford is not committed to the wording. There will be, of course, administrative difficulties if it is possible for a company to say, "We are a company today. We shall not be a company tomorrow but we will be the day after". I should have thought that it was not beyond the wit of the Inland Revenue or the Treasury to devise a scheme whereby if people said that although they were a limited liability company they wanted to be assessed as a partnership that election could last for three or four years.
I am appalled that although throughout the debate the Government have said lime and again that it is not their intention to hit the small man, here are valid figures proving that, probably unwittingly, the Government are hitting the small man. The Minister without Portfolio said, "Of course, people have the advantage of limited liability", and the only advantage he mentioned was limited liability. But, nowadays, most companies would be just as well off, or as badly off, under a partnership structure because they do not go under. The advantage of limited liability is very marginal.
The Minister said that, of course, there would be tax advantages, but, as far as I can see, there will be a tax penalty. This is the point of the figures given by my hon. Friend the Member for Wanstead and Woodford. We are not asking for an advantage. We are not asking that the company should be put into a better position than the sole trader. All we are saying is that small companies—it could be restricted to so much profit—should not be put in any worse position than the sole trader. I hope that the Minister will speak again and tell us that he will look at the matter between now and Report.
Of course, the wording of the Amendment may go too wide. There would be administrative difficulties. We accept that. But we must insist on the principle. If we are introducing a Corporation Tax into our system, we must not, for the sake of dogmatism or obstinacy—I say that in the kindest sense—penalise the small man. If the Minister will only say that he is prepared to look at this, my hon. Friend the Member for Wanstead

and Woodford will, I am sure, be ready to ask leave to withdraw his Amendment.
There have been references to what happens in the United States and what happened in France until a little while ago. The Minister said that he did not mind what happened in the United States. This is all very well. We can all play this game. Sometimes, the Government do not mind what is in the Report of the Royal Commission, unless it suits their argument. If we are recasting our tax system in this way, it is important to consider what is being done, and done very effectively, in the United States to protect the small trader. We should not mind if there was a limit of profit so that above a certain amount there was not parity between the small trader and small companies.
In view of the Minister's disappointing reply and his lack of forthcomingness, unless he has something better to tell us, I shall advise my hon. Friends to divide the Committee.

Sir Eric Fletcher: I must correct the hon. Gentleman on one point. I did not say that I did not mind what happened in the United States. I said that what happened in the United States was not necessarily a precedent for what we should do in this country.
My right hon. Friend has listened very carefully to what has been said in the debate. It would be wrong for me to give the Opposition any encouragement to think that the Government would be willing to reconsider their attitude on this matter between now and Report. We are not resisting this Amendment merely on grounds of administrative inconvenience. We are resisting it on grounds of principle. We consider that a trader is entitled to decide for himself whether to trade as an individual or in partnership or whether he should incorporate himself into a company. In many cases, persons have incorporated themselves for the express purpose of getting a tax advantage.
Perhaps in future, in some cases, they will not get the same amount of tax advantage; but they will still have the opportunity to decide whether to trade as a partnership or as a company, and, having made that decision, they must abide by the tax consequences. We do not think that it would be fair or just to


accept the Amendment and give taxpayers the option to trade in one form and be taxed in another.

Mr. William Clark: Have the Government made any assessment of the number of small companies which, because of the rejection of this Amendment, will now turn themselves back into partnerships? This is an important point, and

the Minister has not addressed himself to it. It is probable that many small companies, because of the tax penalty now on them as compared with sole traders, will become sole traders.

Question put, That those words be there added:—

The Committee divided: Ayes 144, Noes 169.

Division No. 192.]
AYES
[10.44 p.m.


Agnew, Commander Sir Peter
Griffiths, Peter (Smethwick)
Osborn, John (Hallam)


Alison, Michael (Barkston Ash)
Gurden, Harold
Page, R. Graham (Crosby)


Allason, James (Hemel Hempstead)
Hall-Davis, A. G. F.
Pearson, Sir Frank (Clitheroe)


Anstruther-Gray, Rt. Hn. Sir W.
Harris, Frederic (Croydon, N.W.)
Peel, John


Astor, John
Harvey, John (Walthamstow, E.)
Percival, Ian


Awdry, Daniel
Harvie Anderson, Miss
Peyton, John


Barber, Rt. Hn. Anthony
Hawkins, Paul
Pickthorn, Rt. Hn. Sir Kenneth


Barlow, Sir John
Heald, Rt. Hn. Sir Lionel
Pike, Miss Mervyn


Batsford, Brian
Heath, Rt. Hn. Edward
Pitt, Dame Edith


Birch, Rt. Hn. Nigel
Higgins, Terence L.
Powell, Rt. Hn. J. Enoch


Black, Sir Cyril
Hill, J. E. B. (S. Norfolk)
Prior, J. M. L.


Bossom, Hn. Clive
Hobson, Rt. Hn. Sir John
Ramsden, Rt. Hn. James


Box, Donald
Hornsby-Smith, Rt. Hn. Dame P.
Rawlinson, Rt. Hn. Sir Peter


Boyd-Carpenter, Rt. Hn. J.
Howard, Hn. G. R. (St. Ives)
Renton, Rt. Hn. Sir David


Boyle, Rt. Hn. Sir Edward
Hunt, John (Bromley)
Ridley, Hn. Nicholas


Brewis, John
Hutchison, Michael Clark
Roberts, Sir Peter (Heeley)


Brinton, Sir Tatton
Jenkin, Patrick (Woodford)
Rodgers, Sir John (Sevenoaks)


Brown, Sir Edward (Bath)
Jennings, J. C.
Roots, William


Bruce-Gardyne, J.
Kaberry, Sir Donald
Scott-Hopkins, James


Bullus, Sir Eric
Kerr, Sir Hamilton (Cambridge)
Sinclair, Sir George


Chataway, Christopher
Kershaw, Anthony
Smith, Dudley (Br'ntf'd &amp; Chiswick)


Chichester-Clark, R.
King, Evelyn (Dorset, S.)
Spearman, Sir Alexander


Clark, William (Nottingham, S.)
Kirk, Peter
Stanley, Hn. Richard


Cole, Norman
Legge-Bourke, Sir Harry
Stodart, Anthony


Cooke, Robert
Lewis, Kenneth (Rutland)
Stoddart-Scott, Col. Sir Malcolm


Cooper-Key, Sir Neill
Litchfield, Capt. John
Studholme, Sir Henry


Crosthwaite-Eyre, Col. Sir Oliver
Lloyd, Ian (P'tsm'th, Langstone)
Talbot, John E.


Curran, Charles
Longden, Gilbert
Taylor, Edward M. (G'gow, Cathcart)


Dalkeith, Earl of
MacArthur, Ian
Taylor, Frank (Moss Side)


Davies, Dr. Wyndham (Perry Barr)
McLaren, Martin
Teeling, Sir William


d'Avigdor-Goldsmid, Sir Henry
McMaster, Stanley
Temple, John M.


Dean, Paul
McNair-Wilson, Patrick
Thomas, Rt. Hn. Peter (Conway)


Digby, Simon Wingfield
Maitland, Sir John
Turton, Rt. Hn. R. H.


Dodds-Parker, Douglas
Mathew, Robert
van Straubenzee, W. R.


Elliott, R. W.(N'c'tle-upon-Tyne, N.)
Maude, Angus
Walder, David (High Peak)


Emery, Peter
Maudling, Rt. Hn. Reginald
Walker, Peter (Worcester)


Errington, Sir Eric
Maxwell-Hyslop, R. J.
Walker-Smith, Rt. Hn. Sir Derek


Eyre, Reginald
Maydon, Lt.-Cmdr. S. L. C.
Wall, Patrick


Farr, John
Meyer, Sir Anthony
Ward, Dame Irene


Fisher, Nigel
Mills, Peter (Torrington)
Weatherill, Bernard


Fletcher-Cooke, Sir John (S'pton)
Mills, Stratton (Belfast, N.)
Webster, David


Foster, Sir John
Mitchell, David
Whitelaw, William


Fraser, Ian (Plymouth, Sutton)
Monro, Hector
Wills, Sir Gerald (Bridgwater)


Gammans, Lady
More, Jasper
Wilson, Geoffrey (Truro)


Gibson-Watt, David
Morrison, Charles (Devizes)
Yates, William (The Wrekin)


Giles, Rear-Admiral Morgan
Munro-Lucas-Tooth, Sir Hugh
Younger, Hn. George


Glover, Sir Douglas
Murton, Oscar



Gower, Raymond
Noble, Rt. Hn. Michael
TELLERS FOR THE NOES:


Grieve, Percy
Nugent, Rt. Hn. Sir Richard
Mr. Francis Pym and




Mr. Geoffrey Johnson Smith.




NOES


Abse, Leo
Bishop, E. S.
Carmichael, Neil


Allaun, Frank (Salford, E.)
Blackburn, F.
Coleman, Donald


Alldritt, Walter
Blenkinsop, Arthur
Conlan, Bernard


Allen, Scholefield (Crewe)
Boardman, H.
Corbet, Mrs. Freda


Armstrong, Ernest
Bowden, Rt. Hn. H. W. (Leics, S.W.)
Craddock, George (Bradford, S.)


Atkinson, Norman
Bowen, Roderic (Cardigan)
Crossman, Rt. Hn. R. H. S.


Bacon, Miss Alice
Boyden, James
Cullen, Mrs. Alice


Bagier, Gordon A. T.
Braddock, Mrs. E. M.
Dalyell, Tam


Barnett, Joel
Bray, Dr. Jeremy
Davies, G. Elfed (Rhondda, E.)


Beaney, Alan
Broughton, Dr. A. D. D.
Davies, Ifor (Gower)


Benn, Rt. Hn. Anthony Wedgwood
Buchan, Norman (Renfrewshire, W.)
Davies, S. O. (Merthyr)


Bennett, J. (Glasgow, Bridgeton)
Buchanan, Richard
Diamond, John


Bessell, Peter
Callaghan, Rt. Hn. James
Doig, Peter




Donnelly, Desmond
Lawson, George
Rees, Merlyn


Duffy, Dr. A. E. P.
Lee, Rt. Hn. Frederick (Newton)
Rhodes, Geoffrey


Dunn, James A.
Lever, L. M. (Ardwick)
Richard, Ivor


Edwards, Rt. Hn. Ness (Caerphilly)
Lewis, Ron (Carlisle)
Roberts, Albert (Normanton)


Ensor, David
Lomas, Kenneth
Robertson, John (Paisley)


Fernyhough, E.
Lubbock, Eric
Rodgers, William (Stockton)


Fitch, Alan (Wigan)
McBride, Neil
Rogers, George (Kensington, N.)


Fletcher, Sir Eric (Islington, E.)
McCann, J.
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)


Fletcher, Ted (Darlington)
MacDermot, Niall
Silkin, John (Deptford)


Floud, Bernard
McGuire, Michael
Slater, Mrs. Harriet (Stoke, N.)


Foley, Maurice
McInnes, James
Slater, Joseph (Sedgefield)


Fraser, Rt. Hn. Tom (Hamilton)
McKay, Mrs. Margaret
Small, William


Freeson, Reginald
Mackenzie, Alasdair (Ross &amp; Crom'ty)
Smith, Ellis (Stoke, S.)


Galpern, Sir Myer
Mackenzie, Gregor (Rutherglen)
Soskice, Rt. Hn. Sir Frank


Garrett, W. E.
Mackie, John (Enfield, E.)
Steel, David (Roxburgh)


George, Lady Megan Lloyd
MacMillan, Malcolm
Steele, Thomas (Dunbartonshire, W.)


Ginsburg, David
Mahon, Simon (Bootle)
Stewart, Rt. Hn. Michael


Gourlay, Harry
Manuel, Archie
Stones, William


Gregory, Arnold
Mapp, Charles
Summerskill, Hn. Dr. Shirley


Griffiths, David (Rother Valley)
Marsh, Richard
Swingler, Stephen


Griffiths, Rt. Hn. James (Llanelly)
Mason, Roy
Taylor, Bernard (Mansfield)


Grimond, Rt. Hn. J.
Maxwell, Robert
Thomas, Iorwerth (Rhondda, W.)


Hale, Leslie
Mendelson, J. J.
Thomson, George (Dundee, E.)


Hamilton, James (Bothwell)
Millan, Bruce
Thornton, Ernest


Hamilton, William (West Fife)
Miller, Dr. M. S.
Thorpe, Jeremy


Hannan, William
Milne, Edward (Blyth)
Tinn, James


Harrison, Walter (Wakefield)
Molloy, William
Tomney, Frank


Hart, Mrs. Judith
Morris, John (Aberavon)
Urwin, T. W.


Hattersley, Roy
Murray, Albert
Wainwright, Edwin


Herbison, Rt. Hn. Margaret
Neal, Harold
Walden, Brian (All Saints)


Hobden, Dennis (Brighton, K'town.)
Oakes, Gordon
Walker, Harold (Doncaster)


Holman, Percy
Ogden, Eric
Wallace, George


Hooson, H. E.
Orme, Stanley
White, Mrs. Eirene


Houghton, Rt. Hn. Douglas
Oswald, Thomas
Whitlock, William


Howie, W.
Padley, Walter
Wigg, Rt. Hn. George


Hoy, James
Park, Trevor (Derbyshire, S.E.)
Willey, Rt. Hn. Frederick


Hughes, Emrys (S. Ayrshire)
Pearson, Arthur (Pontypridd)
Williams, Clifford (Abertillery)


Hunter, Adam (Dunfermline)
Peart, Rt. Hn. Fred
Willis, George (Edinburgh, E.)


Irving, Sydney (Dartford)
Pentland, Norman
Winterbottom, R. E.


Jackson, Colin
Perry, Ernest G.
Yates, Victor (Ladywood)


Jay, Rt. Hn. Douglas
Popplewell, Ernest



Johnston, Russell (Inverness)
Price, J. T. (Westhoughton)
TELLERS FOR THE NOES:


Jones, Dan (Burnley)
Probert, Arthur
Mr. Joseph Harper and


Kelley, Richard
Pursey, Cmdr. Harry
Mr. Brian O'Malley.


Kenyon, Clifford
Rankin, John

The Temporary Chairman: Before proposing the Question, That the Clause stand part of the Bill, I ask the indulgence of the Committee in asking hon. Members to keep the discussion as short as possible. I have no intention of invoking Standing Order

No. 47, but there will be many opportunities to raise issues on the Schedules and I hope that the Committee will feel content to keep the discussion now as short as possible.

Clause ordered to stand part of the Bill.

Clause 75.—(COMMENCEMENT OF COR- PORATION TAX FOR EXISTING COM- PANIES, AND TRANSITION FROM INCOME TAX.)

Sir John Hobson: I beg to move Amendment No. 671, in page 96, line 37, to leave out from "year" to the end of the subsection and to insert:
and shall for the purposes of income tax be deemed to have ceased to possess that source on the 5th day of April 1966 and shall for the purposes of corporation tax be deemed to have acquired that source on the 6th day of Aril, 1966".
We are grateful to you, Mr. Grant-Ferris, for the impact which you had on the Committee and the shortness of discussion which it produced.
Under the Bill as it stands, on the transition from Income Tax to Corporation Tax there will be a measure of double taxation, and the Amendment is designed to obviate that feature. The Amendment deals with subsection (2), which provides that for sources of income other than those chargeable on a current year basis the Corporation Tax charge first applies to income arising after the end of the 1965–66 basis period. For example, the Accounts to 30th April, 1964, of a company whose accounting date is 30th April will have formed the basis of the period for the assessment for the year 1965–66 and under subsection (2) income arising from 1st May, 1964, will become liable to Corporation Tax assessment on the basis of the actual profits for each accounting period. But Income Tax will have been paid already for both 1964–65 and 1965–66 and there will therefore be an overlap, because the Corporation Tax assessment will also cover the period from 1st May, 1964.
I acknowledge that there are provisions under which the payment of the Corporation Tax is postponed so that one gets a sequence of annual charges, and this may appear to be fair, but only until one gets to the position in which there is a cesser of trade, because, a company put on Corporation Tax in this way may on the cesser of trade pay one extra year's tax, or, in extreme cases, even two years' extra tax, and no allowance will be made for the opening year which has been brought into tax not only for the first, but for the second and possible the third year of taxation. One must

look forward to the possibility that a business may cease to trade. The Income Tax on such a cesser ran only up to the date of closing down and therefore under Income Tax some profits escaped assessment under the existing Income Tax closing down provisions, because one year had already been used twice, or perhaps three times, as the basis of assessment to Income Tax when trading started.
11.0 p.m.
But under the present provisions for Corporation Tax on the basis of the actual profits, no such relief will apply and the company will lose the corresponding relief arising from profits of its opening years which have been brought into charge upon one, two or possibly three years, whenever it ceases to trade, which it would have got if the Income Tax provisions had still continued.
Companies therefore with an accounting date early in each financial year will have been assessed for the combination of Income Tax and Corporation Tax for a longer and greater period on the basis of its first year's profits than in the case of a company whose accounting date is near the end of the fiscal year. The startling illustration was given in a letter on 29th May this year in a periodical called The Accountant which makes the point clearly. I will not trouble the Committee with the letter at the moment, but if the Chief Secretary has not already seen it, I should indeed be grateful if he would look at it and consider it.
Under the Income Tax basis of assessment a company with an early accounting date would have got a longer period of relief on cessation, and this will now be lost and more companies will be taxed for more years than the number of years they have existed due to this overlap in the introduction of Corporation Tax. The Amendment we have put down proposes to deal with this position by providing that all companies should be assessed for Income Tax purposes as though they had ceased to trade on 5th April, 1966, so they would have the benefit of the Income Tax cesser provisions then, and they should be assessed to Corporation Tax from 6th April, 1966, as though they had started to trade on that date.
If the principle of this Amendment is accepted there will, of course, I acknowledge, have to be some arrangements for the provisional payment of tax on 1st January in each year. I believe that in Australia such provisions are made which can be dealt with on the basis of the earlier year's trade and until adjustments of any actual profits are discovered. If there are difficulties over that there must be some other provisions that will deal with this problem. If the Government are not prepared to accept the principle of this Amendment, and we very much hope they will, then what other proposals do the Government have to deal with this problem and a situation in which it would be grossly unfair that a company after 1966, and perhaps after 1967, may have paid Income Tax and Corporation Tax for more years than it has actually traded? We very much hope that the Government will accept our proposals with such amendment or improvement as they think desirable or, if not, that they will tell the Committee what they think is the correct way to deal with this situation.

Mr. Diamond: This Amendment has been moved, as one would expect with moderation and charm by the right hon. and learned Gentleman the Member for Warwick and Leamington (Sir J. Hobson), but it hides a very dramatic proposal, to put it at its least. The right hon. and learned Gentleman draws attention to the complications which exist in the present system with regard to the opening years of a business. I am grateful to him for reminding the Committee of that complication, a complication which has always been with us but which we shall be getting rid of under the simplicities of the Corporation Tax. Once more life for the businessman will be simplicity itself. I am grateful to the right hon. and learned Gentleman for drawing attention to those difficulties.
I hope that I may go on to point out that when we reach Clause 81 we shall deal with the measure of relief to meet the problem which he has explained so clearly that I need not repeat it. That is the Clause which provides what I may call a fitting remedy, and if there are any suggestions which the right hon. and learned Gentleman has to make at that point, I shall be glad to listen to him

carefully. It would be wholly wrong of me to anticipate that discussion in any way.
The Amendment bears some distinguished names of Members for distinguished constituencies. These include Wanstead and Woodford and Warwick and Leamington; these are powerful constituencies to attach to an Amendment of this kind. The Amendment would have the result of providing a tax holiday, with some startling effects. In 1965–66 the effect would be moderate; it would cost the Revenue about £100 million. In 1966–67 the Amendment would be less moderate and woud cost about £1,000 million. The cost would thus be £1,100 million, because the Amendment proposes a complete tax holiday. It proposes that no corporation shall be called on to pay Corporation Tax during the year immediately following the last year of payment of Income Tax. That is an Amendment which I could not describe as wrecking in any disorderly sense, but I could describe it as wrecking the Budget.
As it would cost £1,100 million and as there is another Clause which provides the remedy for the problem which the right hon. and learned Gentleman has explained, I hope that I may suggest to the Committee that the Amendment is not one which I can strongly support.

Sir J. Hobson: The right hon, Gentleman ignores the fact that I said that I was in no sense proposing a tax holiday, and that I recognised that it might be necessary to put down arrangements for the provisional collection of taxation in the two years until the actual trading position for each of those current years had been dealt with. It is wrong of him to suggest that the introduction of Corporation Tax produces a situation of simplicity which will solve all the difficulties, because it wholly ignores the situation that large numbers of companies are already in existence which have had the difficulty which I have pointed out of opening years trading on which they have paid Income Tax for two and possibly three years on a single year's profits which have been assessed to tax.
It may be that an argument arises on the company which starts trading after the introduction of this provision, and I


will not re-open it, but it is false to suggest that the Bill does anything in relation to all those companies which are at present trading or obviates in any way the difficulties which arise because of the existing Income Tax provisions about the opening years of trading. I do not consider that the right hon. Gentleman has dealt with any of the principles of the proposal and I very much regret that.

Amendment negatived.

Mr. Patrick Jenkin: I beg to move Amendment No. 562, in page 96, line 43, at the end to insert:
Provided always that a company shall not come within the charge to corporation tax in respect of a trade, if the company is no longer carrying on the trade at the end of the year 1965–66.
This Amendment is not dissimilar to that moved by my right hon. and learned Friend the Member for Warwick and Leamington (Sir J. Hobson), but I think it arises on a somewhat different state of affairs. The main point on which the problem arises is because of the transitional effect of the change from the taxation of profits as they are now on the preceding year basis, to the taxation, as they will be under the new scheme, on a current year's basis. For the ordinary company continuing, the effect will be that instead of paying the tax during the year of assessment it will be paid nine months after the year of assessment so that the tax is not paid twice in the same year. The position with which this Amendment is concerned arises out of the last Amendment I moved which was so brusquely and lightly case aside by the Minister without Portfolio, namely the case of the company which is going to wind up and go back to being a partnership.
If this is going to happen to any company during this current year 1965–6, the position will arise, unless this Amendment is accepted, that the company will be charged to Corporation Tax in respect of any part of its operations which it carries on as a company during the year and then it will be assessed to Income Tax and Surtax on the same profits. The application of Section 17 of the Finance Act, 1954, to a business in these circumstances, when 75 per cent. of the ownership is in the same hands

before and after the change from a company to a partnership, is that the partnership is taxed upon the profits of the preceding year as if there had been no change of ownership.
The result of the application of Section 17 will be that the partnership will pay tax on the profits of the year we are now in and the company will have to pay tax on the same lot of profits, so that the proprietors of the business will find themselves paying tax twice over on two different bases on the same profits. I cannot really believe that is intended. I have the highest admiration for the skill of the Inland Revenue when dealing with these very technical transitional points which occur on problems of this sort and I can only imagine that at some stage this was pointed out and the Treasury said "No, we will sting them twice, the shareholders and the company. The company will pay tax on the one hand and the partnership will pay tax afterwards."
Is this really what is intended to happen? It seems grossly unfair and I find it difficult to believe it is the case. I cannot see, having searched through the Clause and the Schedules, that this particular case is dealt with. In the last year the company will have to pay the Corporation Tax on one year and the same profits will come in again for Income Tax and Surtax in the hands of the partnership, succeeding the company. This seems most inequitable, and I sincerely hope that there is some explanation. If there is not, I hope that the Chief Secretary will accept the Amendment.

Mr. Diamond: The hon. Gentleman the Member for Woodford imagines a situation in which the Revenue comes forward with a careful proposal—

Mr. Patrick Jenkin: I am sorry to interrupt the Chief Secretary so early in his speech but I have one of my constituents sitting beside me and he reminds me that the constituency in which he resides is called Wanstead and Woodford.

Mr. Diamond: At the moment I cannot recollect what offence I committed, but at all events the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin) imagines a situation in which the Revenue with its usual care


and diligence brings a complicated situation to the attention of the Treasury Ministers who get round a table and perform certain rites and then say with one voice, "Let the so and so pay twice over." That is not absolutely accurate. The hon. Gentleman has drawn attention to a situation which I could not anticipate clearly from reading the Amendment, because it could have covered a variety of situations and I did not know precisely what was in the hon. Gentleman's mind.
11.15 p.m.
The situation requires examination. I can say no more about it than that at present. I could not say offhand with assurance that the matter which the hon. Member has dealt with is adequately catered for. All I can do, therefore, is to ask him, as I could not accept the wording of the Amendment, to give me an opportunity of examining the matter carefully before Report by going through the usual process of being good enough to withdraw it.

Mr. Patrick Jenkin: In view of the very forthcoming approach by the Chief Secretary, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Diamond: I beg to move Amendment No. 342, in page 97, line 12, at the end, to insert:
Provided that this subsection shall not apply unless the said interval is longer than nine months.
The Amendment corrects an oversight in the drafting of subsection (3). Putting it shortly, assuming that a company has a regular accounting date, the tax on its profits would fall on 1st January year after year and no problem is created. The substitution of the alternative period which is suggested for the advantage of the taxpayer may not, however, be advantageous if the company's trade was set up so recently that the "preceding year" basis of assessment had not become fully applicable. This is the basis to which the right hon. and learned Member for Warwick and Leamington (Sir J. Hobson) referred earlier and which results in the regular payment 1st January after 1st January.
There could be a situation in which a company making up its accounts to, say, 30th June in each year would find itself

expected to pay tax under its first Corporation Tax assessment only three months after the date when it had paid its last Income Tax assessment. Therefore, the purpose of the Amendment is to make it clear that there shall be an irreducible minimum period of nine months.

Amendment agreed to.

Clause, as amended, ordered to stand part of the Bill.

Clause 76.—(WINDING UP OF THE PROFITS TAX.)

Sir Eric Fletcher: I beg to move Amendment No. 563, in page 98, line 23, at the end, to insert:
and which are deductible for corporation tax".
This Amendment corrects a flaw in the transitional provisions for Profits Tax and gives the taxpayer additional relief in the cases to which it applies.

Amendment agreed to.

Sir Eric Fletcher: I beg to move Amendment No. 488, in page 98, line 40, to leave out "1947" and to insert "1937".
This Amendment corrects a printing error and substitutes "1937" for "1947".

Amendment agreed to.

Question proposed, That the Clause, as amended, stand part of the Bill.

Sir J. Hobson: I hope that we will be told whether subsection (1,a) is really necessary. I believe that the matter has already been raised with the Inland Revenue and that several weeks ago the Federation of British Industries was given the impression that the Inland Revenue was sympathetic to its case and thought that it was a good one. However, when the Federation saw the Inland Revenue again on Friday, 11th June and pointed out that nothing had been done and that no Amendment had been tabled to the Bill, the Inland Revenue still said that it was sympathetic. By tonight still nothing had been done. Has further consideration been given to the matter, and do the Government intend to do anything about it?
The case arises where there is a company whose Case 1 assessment for 1965–66 is based on the year, say, to 30th September, 1964, and whose Case V assessment for that year is based on the


year to 31st March, 1965. In those circumstances, Corporation Tax will commence for the former as from 1st October, 1964, and for the latter as from 1st April, 1965. The actual overseas dividends for the six months to 31st March, 1965, will, therefore, be included in the Case V assessment for 1965–66 and the actual overseas dividends for the six months to 30th September, 1965, will be included in the Corporation Tax assessment for the year ended on that date.
The Clause deals with the winding up of Profits Tax, but for Profits Tax purposes subsection (1,a) appears to provide that the income of the year to 30th September, 1965, will be apportioned on a time basis, where necessary. The distinction, therefore, is that instead of taking the dividends in the half year when they are received, they are taken for the full year and divided by two, which may produce very different results. Thus, half the overseas dividends for the year to 30th September, 1965, will, as the Clause stands, be liable to Profits Tax. It is suggested that the Profits Tax position should follow the Case V and Corporation Tax position. Then the actual dividends of the six months to 31st March, 1965, should be chargeable to Profits Tax.
Will the Government and the Inland Revenue consider the matter further and do they consider that this is the right way to deal with it; not only that one should apply to Profits Tax the same principle that has been applied to Corporation Tax but that it should be based on actual receipts and not on average receipts for the period? The Federation understood that it had had sympathetic consideration. Is it intended that on Report the Chancellor will do something about this? If not, we shall have to consider tabling Amendments on the subject.

Mr. Terence L. Higgins: I support the remarks of my right hon. and learned Friend the Member for Warwick and Leamington (Sir J. Hobson) in questioning the necessity of subsection (1,a) because, as I understand it, the general principle behind the Clause is that there should not be double taxation of profits in the sense that if they have already borne Income Tax and Profits

Tax they should not then bear Corporation Tax as well.
To quote a different example from that given by my right hon. and learned Friend, it seems that a trading company with accounts ended on 31st December will become liable for Corporation Tax as from 1st January, 1965. Suppose a company has income in the form of dividends abroad, assessable under Case V, or interest, assessable under Case III. It seems that that income will be chargeable to Income Tax and Profits Tax to 5th April, 1965, and that it then comes in for Corporation Tax as from 6th April, 1965, onwards. It seems that there is a possibility of double taxation, because the company's chargeable accounting period will be for the year to 31st December, 1965, so that paragraph (a) comes into operation to decide how much of Case II or Case V Income Tax has to be brought into Corporation Tax computation.
But the subsection says that the income for the year is to be apportioned on a time basis. That means that three-quarters of this income arising in the period from 1st January to 5th April will be brought in for Income Tax. It will therefore be liable to double taxation and, therefore, it will be in conflict with the basic principle underlying the Clause. I should be grateful if the Government would indicate whether I am right in thinking that the basic principle underlying the Clause is that there should not be double taxation, and that paragraph (a) as it stands could create a situation in which double taxation could take place.

Sir Eric Fletcher: The right hon. and learned Gentleman the Member for Warwick and Leamington (Sir J. Hobson) and the hon. Member for Worthing (Mr. Higgins) have asked related questions. The first question is whether paragraph (a) of subsection (1) of Clause 76 is really necessary. The second question is whether certain representations made by the Federation of British Industries to the Inland Revenue have been considered by either my right hon. Friend or myself.
The answer to the first question is that we think that paragraph (a) is necessary. As the Committee will appreciate, this Clause provides some somewhat complicated—and necessarily complicated—provisions for the winding up of the


Profits Tax, and deals with the transitional period during which companies may be liable to the full Corporation Tax or not. In effect, Clause 76 operates to secure that anything that is not taken into Corporation Tax for a particular year under Clause 75 is caught by Profits Tax under Clause 76, as, for example, interest on investments by a trading company.
The reason I think that the paragraph is necessary is that, in terms, it provides for apportionment where the Corporation Tax charged begins from a date in the middle of an accounting period. Suppose a company begins trading on 1st July, 1964, makes up its accounts to 31st December, 1965, and thereafter annually. The 12 months to 31st December, 1965, will be a chargeable accounting period for Profits Tax. The assessment to Income Tax under Case I of Schedule D for 1965–66 will be based on the profits of the first 12 months trading—that is, the 12 months to 30th June, 1965. At the same time, the trading profits from 1st July, 1965, onwards will therefore be chargeable to Corporation Tax and excluded from Profits Tax, whereas the trading profits for the first part of the chargeable accounting period ending on 31st December, 1965, will be chargeable to Profits Tax. It is not very easy to grasp the intricacies of this arrangement in an exchange across the Chamber.
Neither my right hon. Friend nor I myself has yet had an opportunity of considering the representations, to which the right hon. and learned Gentleman referred, made by the Federation of British Industries. We are not unsympathetic to those representations in so far as we understand them at present. Without giving any commitment, the position is that if any alterations in the Bill are required to meet those representations the appropriate way to meet them will not be by deleting paragraph (a) but by making some wider Amendment. The point raised by the right hon. and learned Member will be dealt with by making a special apportionment under Section 20 (4) of the Finance Act, 1937. If he and the hon. Member will allow me, I shall look into the matter carefully and sympathetically between now and Report and consider whether an Amendment to any other part of the Bill is required.

11.30 p.m.

Sir J. Hobson: I am grateful to the Minister for giving an undertaking to look into the matter. I hope that when he has considered it he will think that it is a matter which requires to be dealt with. If, on the other hand, he does not, I shall be grateful if he will let me know so that we can consider what should be done.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.

Clause 77.—(INTERIM CHARGE OF TAX ON CAPITAL GAINS OF COMPANIES, AND EXCLUSION OF COMPANIES AND LOCAL AUTHORITIES FROM CASE VII OF SCHEDULE D.)

Sir Eric Fletcher: I beg to move Amendment No. 566: In page 100, line 15, at the end to insert:
; and for those purposes the question whether any and, if so what, gain or loss so accrues shall accordingly be determined in accordance with the provisions applicable to income tax chargeable under Case VII of Schedule D and not in accordance with the provisions of Part III of this Act.".
If it is convenient, Mr. Grant-Ferris, in moving this Amendment I shall also deal with Amendments Nos. 567, 568, 564 and 565.

The Temporary Chairman (Mr. Grant-Ferris): I think it would be for the convenience of the Committee to follow that procedure.

Sir Eric Fletcher: These Amendments are all in the nature of clarifying Amendments to make the provisions of Clause 77 even clearer and simpler than at present. Unless the Committee so desires, I shall not explain the precise effect of each of these five Amendments. I imagine that they have been carefully examined by the Opposition. They do not make any substantive change, but are intended to improve the language and are in the nature of clarifying Amendments.

Mr. Peter Walker: We shall be very happy to co-operate with the right hon. Gentleman and take these Amendments together, but that does not necessarily mean that we want no explanation of them. His description of them as clarifying Amendments simplifying the Bill does not amount to an


explanation. Amendment No. 566 will make a substantial difference and is not simply a clarifying Amendment.
As the Bill stands without this Amendment losses sustained on this type of gain under Part III of the Act will apply, whereas by making this Amendment the Chancellor is only allowing losses under Case VII of Schedule D. As the Bill is worded, an art dealer could take advantage of losses sustained prior to the Bill. I would agree with the Amendment, but it is wrong to describe it as a clarifying Amendment.
The right hon. Gentleman also owes us an explanation on Amendment No. 567. It is rather remarkable to call that a clarifying Amendment, because it completely deletes a subsection. That seems a new way of clarifying a Bill. A very good way of clarifying the Bill might be to delete the whole of this part, but, as the Government are intent on using this method, some explanation is required of why the Government inserted the subsection and then decided that they should delete it.
There is some mystery about the subsection because, as far as I can see, it is the only subsection which is not referred to in the White Paper. All other subsections have a little note about them in the White Paper, but when the Chancellor drew up the White Paper and he came to the famous subsection (4) he decided that it was not worth commenting on. If it was not worth commenting on, and if the Government discovered this at the stage of printing the White Paper, which was published at the same time as the Bill, it is remarkable that the Bill at first contained the subsection. We on this side immediately rushed to paragraph 3 of the Sixth Schedule to see what grave implications the subsection had. I spent many hours trying to fathom what it meant and came to the conclusion, to which the Chancellor has presumably now come, that it is complete nonsense. Therefore, I ask the Minister without Portfolio to explain why the subsection was ever in the Bill and to admit that these Amendments are not just clarifying Amendments.

Sir Eric Fletcher: I should have thought that it was obvious from what the hon. Gentleman has said that the

deletion of subsection (4) clarifies this part of the Bill. In deference to the Committee, perhaps I should elaborate a little more. Subsection (2,a), together with subsections (3) and (4), were intended to ensure that all the gain arising to a company from the disposal after Budget day of an asset acquired before Budget day would be chargeable to Capital Gains Tax, if the acquisition and the disposal took place within the old short-term tax time limits.
We came to the conclusion that it was doubtful whether the subsections as they stood successfully secured that result. Subsection (4) reads:
Subsection (2)(a) above, shall not affect paragraph 3 of Schedule 6 to this Act.
We came to the conclusion that the subsecution had an element of obscurity about it, that it was not necessary to give effect to the intentions, which are agreed intentions, of this part of the Clause, and therefore that the Bill would be much clearer if it were deleted.

Mr. Peter Walker: I must confess that the Minister without Portfolio has almost convinced me that subsection (4) is necessary. I suspect that we will leave a serious gap in the Bill and allow all sorts of evasion to take place if we allow it to go. I take note of the Minister without Portfolio's answer. I suggest that we accept the Amendments.

Amendment agreed to.

Further Amendments made: In page 100, line 16, leave out subsection (4).

In line 18, leave out from "Any" to "in" in line 21, and insert:
losses which are allowable against chargeable gains under subsection (1) above or would be so allowable but for the company being within the charge to corporation tax from the beginning of the year 1965–66,".

In line 45, leave out from "tax" to end of line 1 on page 101.

And in page 101, line 2, leave out from "shall" to second "to" in line 3 and insert:
extend to all the provisions of Schedule 12 to this Act, including those relating to the recovery of tax, and".—[Sir E. Fletcher.]

Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Peter Walker: Having granted the Government five quick Amendments,


there is one aspect of the Clause which should be discussed. The Clause is basically divided into two parts, one dealing with the fact of seeing that the Capital Gains Tax on certain companies shall be charged although perhaps those companies may not come under the Corporation Tax provisions. This, I presume, is to capture companies which, for example, cease trading at the end of the year, which we fully understand.
On that part of the Clause we on this side of the Committee have constantly complained of the manner in which companies are going to be taxed thus causing double taxation to the individual. We have pointed out the unfairness of this proposal on investment trusts and unit trusts. We heard the other day from the Chief Secretary that as a result of these provisions insurance companies were to be taxed to the extent of £23 million a year out of their funds. We have given many examples, which I will not repeat, of why we are opposed to double taxation when a capital gain occurs within a company. Therefore, we are opposed to this Clause, as we have been opposed to previous Clauses which have brought about this injustice where the share holder is taxed at 54 per cent. rather than at 30 per cent.
On the remainder of the Clause there is a very important point of principle which I would ask the Minister to explain. Basically this Clause is doing away with the short-term Capital Gains Tax of the company and it is substituting for it the permanent long-term Capital Gains Tax that the Government consider necessary. This brings about a very interesting and wide gap between the treatment of the individual as opposed to the treatment of the company. Previously the individual was taxed for short-term Capital Gains Tax at the rate of Income Tax and Surtax, and the company was taxed at the rate of Income Tax and Profits Tax. Therefore, we have a situation in which the Government have decided that so far as the company is concerned they will substitute for the 56¼ per cent. rate of tax on short-term capital gains the much lower rate of 35 per cent. or 40 per cent. depending on the rate of Corporation Tax.
So the company has been treated to a considerable reduction in the rate of tax as far as short-term capital gains are

concerned. But the individual, instead of being charged a reduced rate of tax for short-term capital gains, has had the period in which he can suffer from the higher rates of tax increased. We therefore have the position in which the individual, when the capital gain takes place in the first 12 months, will be taxed at the rate of Income Tax and Surtax whereas the company will be taxed at the rate of Corporation Tax. This means that the majority of people who decide to engage in any form of transaction which is liable to result in a short-term capital gain are likely to do it by forming a company, thereby paying the 35 per cent. rate of tax, rather than do it as an individual which would render them liable to pay Income Tax and Surtax.

Mr. Lubbock: In fact, they will not pay 35 per cent. They will pay 56 per cent.

Mr. Walker: I agree, but as far as the Surtax payer is concerned the original rate will be a better proposition. It will pay the Surtax payer on the higher rate to form a company to carry out the transaction and pay the total of 54 per cent. instead of paying the higher tax which he would pay otherwise.
There must be some explanation why the Government have decided that for companies it is right to have the one level of Capital Gains Tax of 35 per cent. or 40 per cent., whichever it may be, but, for the individual, to continue to have a very high and, for some people, penal rate of taxation for the first 12 months. This is a remarkable difference in treatment for the individual and for the company, and this difference requires some explanation.

11.45 p.m.

Sir Eric Fletcher: The hon. Member for Worcester (Mr. Peter Walker) made two points. First, he pointed out that to some extent the Opposition wish to repeat on this Clause the objections which they previously raised to companies being liable to Corporation Tax on capital gains. In so far as he made that argument he was doing no more than repeating arguments addressed to the Committee on earlier Clauses and therefore I do not think that I need deal with them. Over and over again we have indicated why we think that all the gains, whether profits in the old sense or capital gains accruing


to a company, should be chargeable for Corporation Tax, and it would be tedious to repeat the arguments put forward by my hon. and right hon. Friends in that respect.
Secondly, a point of some detail which I was asked to explain was why the Government have adopted this method of dealing with the interim charge of tax on capital gains of companies and to explain why there appears superficially to be a distinction between the treatment of individuals and the treatment of companies in respect of the change from short-term capital gains to long-term capital gains. In part the answer to the hon. Member is that this is inherent in the complete separation of Income Tax and Surtax for individuals and Corporation Tax for companies.
In so far as the short-term capital gain is being abolished, it is not entirely correct to say, as the hon. Member said, that the period of operation of the short-term Capital Gains Tax is being extended. In the case of moveables it is being extended from six months to 12 months, but in the case of land it is being reduced from three years to one year. Therefore the apparent contradiction to which the hon. Member referred is in part a reflection of the fact that the whole concept of short-term capital gains with differential time limits according to whether land or securities is involved is being replaced by one with a single operative time limit.
It is far-fetched for the hon. Member to think that some individuals will be tempted to form companies to get the apparent benefit of being able to deal with short-term capital gains. We do not think that the provisions in the Clause will have those undesirable results and although I suppose there will inevitably be some anomaly or difficulty somewhere in translating short-term capital gains with two differential terminal periods into long-term capital gains and making the appropriate transitional provisions, we think that this is by far the best and fairest provision that could be devised.

Sir D. Glover: I understand the Minister without Portfolio to say that my hon. Friend the Member for Worcester (Mr. Peter Walker) was wrong in saying that the Government were extending

short-term Capital Gains Tax from six months to 12 months. The hon. Gentleman said that it was not true because in the case of land the period was being reduced from three years to 12 months. Is not this exactly the situation to which my hon. Friend was drawing attention in his interjection? If the period in respect of land is reduced to 12 months, would not that be exactly the situation in which somebody entering into purchase would form a company, because by doing so he would avoid the excess which otherwise he would have to pay in Income Tax and Surtax? The very fact that the period for land is being reduced from three years to one year shows how inadequately, as usual, the Government have thought out their proposal. The Government must look at this again. At present, the Clause is nonsense.

Mr. Peter Walker: On the first point which the Minister made, although he is quite right to say that we have had the arguments about double taxation before, I must impress upon him how important we regard these matters. Through our proceedings, it has been shown that unit trusts, investment trusts and settlements—the hon. Member for Orpington (Mr. Lubbock) dealt with them—all are caught by double taxation as a result of including companies in this way. Therefore, from that point of view alone, we are dissatisfied with the Clause.
As regards the short-term differential, the Minister is underestimating the importance of this question. The Government have decided that for companies the rate of short-term Capital Gains Tax is to be reduced from 56¼ per cent. to 35 per cent. For the individual, they have decided that for the majority of transactions it shall stay at the rate of Income Tax and Surtax for a far longer period. The Minister said that he did not really think that people would bother to form a company for the purpose of these transactions. His advisers are bound to advise anyone who is a Surtax payer above the level of 56¼ per cent. to form a company for that purpose. Therefore, by the way the Clause has been drafted, the Government are putting a maximum level of short-term Capital Gains Tax on anyone who is well advised of 56¼ per cent., which, presumably, is what they do not want to do because they would like


to catch such a person for Income Tax and Surtax.
I am sure that, on reflection, the Government will find that they will want to introduce some Amendments on Report. They have moved five Amendments to this Clause already, whereas the average has been only three Government Amendments to each Clause so far.

However, in spite of five Amendments to it, this still remains a thoroughly bad Clause, and I advise my hon. and right hon. Friends to divide against it.

Question put, That the Clause, as amended, stand part of the Bill:—

The Committee divided: Ayes 152, Noes 146.

Division No. 193.]
AYES
[11.52 p.m.


Abse, Leo
Hale, Leslie
Orme, Stanley


Allaun, Frank (Salford, E.)
Hamilton, James (Bothwell)
Oswald, Thomas


Alldritt, Walter
Hamilton, William (West Fife)
Padley, Walter


Allen, Scholefield (Crewe)
Hannan, William
Pearson, Arthur (Pontypridd)


Armstrong, Ernest
Harper, Joseph
Peart, Rt. Hn. Fred


Bacon, Miss Alice
Harrison, Walter (Wakefield)
Pentland, Norman


Bagier, Gordon A. T.
Hart, Mrs. Judith
Perry, Ernest G.


Barnett, Joel
Hattersley, Roy
Popplewell, Ernest


Beaney, Alan
Herbison, Rt. Hn. Margaret
Price, J. T. (Westhoughton)


Benn, Rt. Hn. Anthony Wedgwood
Hobden, Dennis (Brighton, K'town.)
Probert, Arthur


Bennett, J. (Glasgow, Bridgeton)
Holman, Percy
Rankin, John


Bishop, E. S.
Houghton, Rt. Hn. Douglas
Rees, Merlyn


Blackburn, F.
Howie, W.
Rhodes, Geoffrey


Blenkinsop, Arthur
Hoy, James
Richard, Ivor


Boardman, H.
Hughes, Emrys (S. Ayrshire)
Roberts, Albert (Normanton)


Bowden, Rt. Hn. H. W. (Leics, S.W.)
Hunter, Adam (Dunfermline)
Robertson, John (Paisley)


Boyden, James
Irving, Sydney (Dartford)
Rodgers, William (Stockton)


Braddock, Mrs. E. M.
Jackson, Colin
Rogers, George (Kensington, N.)


Bray, Dr. Jeremy
Jay, Rt. Hn. Douglas
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)


Buchan, Norman (Renfrewshire, W.)
Jeger, George (Goole)
Silkin, John (Deptford)


Buchanan, Richard
Jones, Dan (Burnley)
Slater, Mrs. Harriet (Stoke, N.)


Callaghan, Rt. Hn. James
Kenyon, Clifford
Slater, Joseph (Sedgefield)


Carmichael, Neil
Lawson, George
Small, William


Coleman, Donald
Lee, Rt. Hn. Frederick (Newton)
Smith, Ellis (Stoke, S.)


Conlan, Bernard
Lever, L. M. (Ardwick)
Soskice, Rt. Hn. Sir Frank


Corbet, Mrs. Freda
Lewis, Ron (Carlisle)
Steele, Thomas (Dunbartonshire, W.)


Craddock, George (Bradford, S.)
Lomas, Kenneth
Stewart, Rt. Hn. Michael


Cullen, Mrs. Alice
McBride, Neil
Stones, William


Dalyell, Tam
McCann, J.
Summerskill, Hn. Dr. Shirley


Davies, G. Elfed (Rhondda, E.)
MacDermot, Niall
Swingler, Stephen


Davies, S. O. (Merthyr)
McGuire, Michael
Taylor, Bernard (Mansfield)


Diamond, Rt. Hn. John
McInnes, James
Thomas, Iorwerth (Rhondda, W.>


Doig, Peter
McKay, Mrs. Margaret
Thomson, George (Dundee, E.)


Donnelly, Desmond
Mackenzie, Gregor (Rutherglen)
Thornton, Ernest


Duffy, Dr. A. E. P.
Mackie, John (Enfield, E.)
Tinn, James


Dunn, James A.
MacMillan, Malcolm
Urwin, T. W.


Edwards, Rt. Hn. Ness (Caerphilly)
Mahon, Simon (Bootle)
Wainwright, Edwin


Ensor, David
Manuel, Archie
Walden, Brian (All Saints)


Fernyhough, E.
Mapp, Charles
Walker, Harold (Doncaster)


Fletcher, Sir Eric (Islington, E.)
Marsh, Richard
Wallace, George


Fletcher, Ted (Darlington)
Mason, Roy
White, Mrs. Eirene


Floud, Bernard
Maxwell, Robert
Whitlock, William


Foley, Maurice
Mendelson, J. J.
Wigg, Rt. Hn. George


Fraser, Rt. Hn. Tom (Hamilton)
Millan, Bruce
Willey, Rt. Hn. Frederick


Galpern, Sir Myer
Miller, Dr. M. S.
Williams, Clifford (Abertillery)


Garrett, W. E.
Milne, Edward (Blyth)
Willis, George (Edinburgh, E.)


George, Lady Megan Lloyd
Morris, John (Aberavon)
Winterbottom, R. E.


Ginsburg, David
Murray, Albert
Yates, Victor (Ladywood)


Gourlay, Harry
Neal, Harold



Gregory, Arnold
Oakes, Gordon
TELLERS FOR THE NOES:


Griffiths, David (Rother Valley)
Ogden, Eric
Mr. Ifor Davies and


Griffiths, Rt. Hn. James (Llanelly)
O'Malley, Brian
Mr. Alan Fitch.




NOES


Agnew, Commander Sir Peter
Bessell, Peter
Bruce-Gardyne, J.


Alison, Michael (Barkston Ash)
Birch, Rt. Hn. Nigel
Bullus, Sir Eric


Allason, James (Hemel Hempstead)
Black, Sir Cyril
Chataway, Christopher


Anstruther-Gray, Rt. Hn. Sir W.
Bossom, Hn. Clive
Chichester-Clark, R.


Astor, John
Bowen, Roderic (Cardigan)
Clark, William (Nottingham, S.)


Awdry, Daniel
Box, Donald
Cole, Norman


Barber, Rt. Hn. Anthony
Boyd-Carpenter, Rt. Hn. J.
Cooke, Robert


Barlow, Sir John
Boyle, Rt. Hn. Sir Edward
Cooper-Key, Sir Neill


Batsford, Brian
Brewis, John
Crosthwaite-Eyre, Col. Sir Oliver


Bennett, Sir Frederic (Torquay)
Brinton, Sir Tatton
Curran, Charles


Berry, Hn. Anthony
Brown, Sir Edward (Bath)
Dalkeith, Earl of




Davies, Dr. Wyndham (Perry Barr)
Johnson Smith, G. (East Grinstead)
Pickthorn, Rt. Hn. Sir Kenneth


d'Avigdor-Goldsmid, Sir Henry
Johnston, Russell (Inverness)
Pike, Miss Mervyn


Dean, Paul
Kaberry, Sir Donald
Pitt, Dame Edith


Digby, Simon Wingfield
Kerr, Sir Hamilton (Cambridge)
Powell, Rt. Hn. J. Enoch


Dodds-Parker, Douglas
Kershaw, Anthony
Prior, J. M. L.


Emery, Peter
King, Evelyn (Dorset, S.)
Pym, Francis


Errington, Sir Eric
Kirk, Peter
Rawlinson, Rt. Hn. Sir Peter


Eyre, Reginald
Legge-Bourke, Sir Harry
Renton, Rt. Hn. Sir David


Farr, John
Litchfield, Capt. John
Ridley, Hn. Nicholas


Fisher, Nigel
Lloyd, Ian (P'tsm'th, Langstone)
Roberts, Sir Peter (Heeley)


Fletcher-Cooke, Sir John (S'pton)
Longden, Gilbert
Roots, William


Foster, Sir John
Lubbock, Eric
Scott-Hopkins, James


Fraser, Ian (Plymouth, Sutton)
MacArthur, Ian
Stanley, Hn. Richard


Gammans, Lady
Mackenzie, Alasdair (Ross &amp; Crom'ty)
Steel, David (Roxburgh)


Gibson-Watt, David
Mackie, George Y. (C'ness &amp; S'land)
Stodart, Anthony


Giles, Rear-Admiral Morgan
McLaren, Martin
Stoddart-Scott, Col. Sir Malcolm


Glover, Sir Douglas
McNair-Wilson, Patrick
Studholme, Sir Henry


Gower, Raymond
Maitland, Sir John
Talbot, John E.


Grieve, Percy
Mathew, Robert
Taylor, Edward M. (G'gow, Cathcart)


Griffiths, Peter (Smethwick)
Maude, Angus
Taylor, Frank (Moss Side)


Grimond, Rt. Hn. J.
Maudling, Rt. Hn. Reginald
Teeling, Sir William


Gurden, Harold
Maxwell-Hyslop, R. J.
Temple, John M.


Hall-Davis, A. G. F.
Maydon, Lt.-Cmdr. S. L. C.
Thomas, Rt. Hn. Peter (Conway)


Harris, Frederic (Croydon, N.W.)
Meyer, Sir Anthony
Turton, Rt. Hn. R. H.


Harvey, John (Walthamstow, E.)
Mills, Peter (Torrington)
van Straubenzee, W. R.


Harvie Anderson, Miss
Mills, Stratton (Belfast, N.)
Walder, David (High Peak)


Hawkins, Paul
Mitchell, David
Walker, Peter (Worcester)


Heald, Rt. Hn. Sir Lionel
Monro, Hector
Walker-Smith, Rt. Hn. Sir Derek


Heath, Rt. Hn. Edward
More, Jasper
Wall, Patrick


Higgins, Terence L.
Morrison, Charles (Devizes)
Ward, Dame Irene


Hill, J. E. B. (S. Norfolk)
Munro-Lucas-Tooth, Sir Hugh
Webster, David


Hobson, Rt. Hn. Sir John
Murton, Oscar
Whitelaw, William


Hooson, H. E.
Noble, Rt. Hn. Michael
Wilson, Geoffrey (Truro)


Hornsby-Smith, Rt. Hn. Dame P.
Osborn, John (Hallam)
Yates, William (The Wrekin)


Howard, Hn. G. R. (St. Ives)
Page, R. Graham (Crosby)
Younger, Hn. George


Hunt, John (Bromley)
Pearson, Sir Frank (Clitheroe)



Hutchison, Michael Clark
Peel, John
TELLERS FOR THE NOES:


Jenkin, Patrick (Woodford)
Percival, Ian
Mr. R. W. Elliott and


Jennings, J. C.
Peyton, John
Mr. Dudley Smith.

Mr. Edward Heath: I beg to move,
That the Chairman do report Progress and ask leave to sit again.
I do so in order to ask the Chancellor of the Exchequer what his intentions are. It is now midnight, we have been debating for 8½ hours and all those who have listened to the debates will agree that they have all been serious. They have at the same time been extremely detailed, because we are dealing with a complex part of the Bill. We are now faced with Clause 78, to which the Government have put down a considerable number of Amendments which have recast the Bill. In addition, the Chairman of Ways and Means has selected, as I calculate, 11 Opposition Amendments for debate on Clause 78, many of which will be major debates.
On Clause 79, when we start considering the transitional provisions for Corporation Tax and those companies trading overseas, the Government are again recasting by a considerable number of major Amendments. I must therefore point out that if the right hon. Gentleman wishes to continue the discussion of the Bill at this stage he is embarking on an all-night Sitting again.
As tomorrow there are, in the Palace of Westminster, to be celebrations to which I understand all hon. Members attach considerable importance, I must make it plain to the right hon. Gentleman that he and the Government are themselves entirely responsible for embarking on an all-night Sitting.

The Parliamentary Secretary to the Ministry of Labour (Mr. Richard Marsh): The Parliamentary Secretary to the Ministry of Labour (Mr. Richard Marsh) indicated dissent.

Mr. Heath: I hope that the Parliamentary Secretary to the Ministry of Labour is not suggesting that the Government are irresponsible. The Government are entirely responsible for embarking on an all-night Sitting of the Committee prior to a day on which these important events are to take place.

The Chancellor of the Exchequer (Mr. James Callaghan): I think that it is very reasonable of the right hon. Gentleman the Member for Bexley (Mr. Heath) to ask what the Government's intentions are in this matter and I want to be as frank as I can. It is true that we have had a number of detailed debates today and it is not for me to comment on the length of them, except to say that one Clause


took us six hours to dispose of—I am not drawing conclusions; I am merely stating the facts—although there had been a number of earlier discussions on very similar points. Since then we have moved very fast.
During the last two hours, with the help of the whole Committee and with hon. Members keeping their speeches reasonably short—I hope that no one will mind my saying that—we have secured five Clauses. If it had been possible to make quicker progress in debating the Clause which took six hours, I would certainly have hoped to have moved to report Progress at about this time. However, we spent rather a long time on one Clause—I do not complain about it, but merely state that it was so. We want a full attendance in Westminster Hall tomorrow. I shall certainly be there and I hope that all my hon. and right hon. Friends and that everybody else will be there for the celebrations, but we must make some further progress tonight. There is important work for us to do.
We need not be overwhelmed by the number of debates which can arise, because many of them will be on concessions. I know that that is a word which I must not use, but they represent Amendments by the Government to meet representations which have been made by industry and commerce and right hon. and hon. Gentlemen opposite. It would not be right to deduce from the number of Amendments to be discussed that they will necessarily take the time which might be assumed. If there are Amendments which both concede a good deal of money and at the same time meet the legitimate points which have been put to us, there is not the same necessity, I hope, to debate them at any great length. I merely say that I hope to conclude at an early hour. I hope that we shall not go on too long, but that we should like to make a little more progress and see how far we can get tonight.

Mr. Heath: The Chancellor of the Exchequer has been far from explicit about what he hoped to do. We can deduce only that he has not reached firm decisions about what point of the Bill he would like to reach. He said that he would deal only with facts. He said that we had spent six hours on Clause 72, which is a very important Clause dealing with the pith and substance of close com-

panies and for a large part of the debate it was one for one from each side of the Committee. The most violent row of the debate, in so far as there has been a row, took place between the hon. Member for Manchester, Cheetham (Mr. Harold Lever), who now seems to have been banished from the Chamber—

Mr. Harold Lever: Mr. Harold Lever indicated dissent.

Mr. Heath: —and his right hon. Friend the Chief Secretary. I quote the hon. Gentleman as saying that a large part of Clause 72 was fallacious in logic and being perpetrated by sheer obstinacy. Nothing like that has been said from this side of the Committee in the whole of the day's discussion. That shows that the Clause was a very important matter to both sides of the Committee.
We will proceed with Clause 78 and I make it clear and public that the responsibility rests firmly on the shoulders of the Government. What we have found it very difficult to bring home to the Government is that discussion of the complicated details of a Bill of this kind takes far more time than they have ever allowed, even when Ministers are only moving Government Amendments and explaining what they mean. It was quite evident to the Committee that Clause 72 was of considerable importance. Now we have to continue the process.
The Committee appreciates the Amendments which the Chancellor has brought forward to meet the various representations which have been made to him, but that does not alter the fact that many other representations have been made to him which he has not yet found himself able to meet. It is only right that hon. Members should put forward Amendments dealing with those matters and argue the case in a serious and reasoned manner.
So we shall continue what we have done for 13 days on this Bill and argue these important matters seriously and in detail, and I therefore beg to ask leave to withdraw the Motion.

Motion, by leave, withdrawn.

Clause 78.—(DIVIDEND INCREASES IN 1965–66.)

Mr. Diamond: I beg to move Amendment 749, in page 101, line 11, after "shall" to insert:
(as regards that company)".


We are now dealing with the Clause which relates to forestalling and measures where there is any forestalling by taking, as it were, a standard period and reckoning the dividend in that period and comparing it with a dividend paid during the year 1965–66. This Amendment is to make it clear that when a company is required to account for Income Tax in respect of an excess of dividends paid in 1965–66 over the standard amount, as I have described, a company which receives the dividend will not be entitled to bring any part of the dividend into its own account so as to use Income Tax paid as cover for Income Tax due on its own dividend which it may pay out after 1965–66.
The interpretation of the Clause previously was not absolutely clear. It could have been interpreted as referring not only to the receiving company but also to the paying company. If that interpretation prevailed, the purpose of the legislation would be frustrated in so far as excess dividends are paid to company shareholders. The Amendment makes the position clear. Only the company paying the dividend is to bring it into account under Clause 43(3), and Clause 44—that is in order to secure that it accounts for the Income Tax.

Mr. William Clark: I do not want to detain the Chief Secretary for too long, but does this Amendment affect the position of investment trusts at all? Can he say whether, on the standard period, they have to pay out 90 per cent. of income, and will still have to pay out 90 per cent. in subsequent years?

Mr. Diamond: I speak from memory but I can say clearly that this does not affect investment companies. There is a later stage where we can clear the ground on investment companies. This has no reference to that particular problem.

Amendment agreed to.

Mr. van Straubenzee: I beg to move Amendment No. 625, in page 101, line 15, to leave out from "year" to the end of line 16.
As the Chief Secretary will appreciate, this Amendment is directed to the election provisions under an earlier Clause, Clause 44, the standard dividend provision. As I understand it, a company may

pay dividends during the year 1965–66 in excess of its standard dividend as defined by the Clause, and the recipient will incur no tax in respect of the excess, except possibly Surtax. But the excess is regarded, so far as the paying company is concerned, as dividend paid on 6th April, 1966. The consequence is that the paying company is obliged to account to the Revenue for Income Tax at the standard rate in respect of the excess.
The effect of the subsection we are now discussing produces, it is suggested to the Chief Secretary, an anomaly for subsidiary companies. Clearly under Clause 44(3) in later years they can effectively pay a dividend gross to the parent company but an election under that Clause does not seem to be effective so far as the excess of a dividend over the standard dividend in 1965–66 is concerned.
I put it to the Chief Secretary that this is particularly difficult for wholly-owned subsidiaries which are expanding where profits are increasing sharply, since the parent company is denied the benefits of the increasing profitability for a period of 12 months. Since dividends paid by the parent company to their shareholders will already be restricted under the Clause, there seems to be no particularly good object in applying this restriction to dividends paid by subsidiaries to parent companies, particularly because Section 44 will later apply. That is the short point of the Amendment. To follow the Minister without Portfolio, it is a clarifying Amendment to clarify even further an already clear Clause, and I hope that in that spirit the Chief Secretary will accept it.

12.15 a.m.

Sir Eric Fletcher: I am afraid that I cannot advise the Committee to accept the Amendment, and I hope that the hon. Member for Wokingham (Mr. van Straubenzee) will agree, if he has had an opportunity to study Amendment No. 750 in the name of the Chancellor of the Exchequer, which is a paving Amendment to a new Schedule. It proposes to insert at the end of line 16 on page 101:
Provided that, in relation to the cases dealt with by the Schedule (Supplementary provisions about dividend increases in 1965–66) to this Act, this section shall have effect subject to the provisions of that Schedule.
I understand that the hon. Gentleman may not have had an opportunity of


studying the details of the Schedule which is introduced by my right hon. Friend's Amendment. I am afraid that it is a somewhat lengthy and elaborate Schedule. When we reach it, I think that he will find that we have gone a long way, if not all the way, to meet the point which he has in mind. The Chancellor's Amendment and the new Schedule provide new rules under which dividends paid by a subsidiary to a parent or another company which is a joint subsidiary of a common parent are kept outside the forestalling provisions altogether.
The present Amendment, therefore, loses its force in relation to the cases dealt with by the Chancellor's Amendment. I do not think that I should be doing my duty if I did not point out that there are still a few marginal cases which the hon. Member would probably wish to be covered which are not in fact covered by the Chancellor's Amendment and that, I think, arises from the fact that in our provisions regarding a company which is a subsidiary we have introduced the 75 per cent. test whereas the hon. Member would have preferred the 50 per cent. test, but if we are to keep the provisions regarding subsidiaries in line, we must adhere to the 75 per cent. test. But with that qualification, which I should be failing in my duty if I did not mention, I think that we have substantially met the point.

Mr. van Straubenzee: I am grateful, as always, to the Minister without Portfolio for that explanation. I am sure that he in turn will understand that our Amendment was on the Order Paper for a considerable time before the Chancellor's Amendment. That is why it is being moved in this form. It long preceded the new Schedule—the new and very complicated Schedule which the Chancellor seeks to add.
I accept the Minister without Portfolio's point that there are certain considerable limitations to the acceptance of the principle put forward in this Amendment, in the Schedule to which we shall come later. It goes a considerable way to meet the point, and in view of the fact that the Government have moved a considerable way to meet us, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Patrick Jenkin: I beg to move Amendment No. 779, in page 101, line 16, at the end to insert:
provided that in computing the gross amount of such dividends paid in the year 1965–66 there shall be disregarded the gross amount of any dividends paid in respect of shares in the capital of the company which entitle the holders thereof to a dividend at a fixed rate or to a dividend at a rate varying with the standard rate of income tax but to no other right to share in the profits of the company, in so far as such dividends represent arrears of dividends due in an earlier year".
This is a very short point and I must confess to some surprise that it is not one that has been taken by the Government. I hope they will be able to be as forthcoming on this as they were on the last Amendment I moved. The point concerns arrears of preference dividends. A company, broadly, has no choice as to whether or not it shall pay a preference dividend, except in the circumstances where the company's profits are not sufficient to allow it to pay one. In this situation it may pass the dividend altogether or it may pay something less than the full amount of the preference dividend.
The Amendment is intended to cover the case where, during the standard years, a company paid something less than the full preference dividend and then for the year in question, what one might call the forestalling year, it paid a full dividend, including, perhaps, arrears of the preference dividend. It would seem to be extremely hard in that case that a company should be charged to Income Tax under the new system on the arrears of the preference dividend, which, had the company had profits, would have been paid in the earlier years. The point is as brief as that and I cannot elaborate on it. I hope that the Chief Secretary or whoever replies will give some indication that this is a problem which the Government can look at with some sympathy.

Mr. John Harvey: I should like to extend the argument that has been put forward by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and urge the Front Bench opposite to give this Amendment not only favourable consideration but perhaps to look even more fully at this problem between now and Report. As the hon. Member for Wanstead and Woodford said, a company has really


no choice but to pay a preference dividend unless its lack of profits make it impossible to do so.
Following that reasoning my attention has been drawn to a case where in the opening year a company, of which I can supply details, was unable to pay its full preference dividend. Consequently, it now finds itself penalised because what happened was that during the basic period the shares, which were £1 shares entitled to 6½ per cent. non-cumulative preference dividend, received nothing because there were no payments. Last year the company managed to pay 2¾ per cent. on the preference dividend and this year, other things being equal, it would normally pay 6 per cent., which represents the whole of its earnings at the moment, but is still less than the fixed amount. The very fact that it is going to pay 6 per cent. already involves the company in a heavy liability to the new tax, but I reiterate that it is still short of the amount that it should be paying under the preference arrangement whereby it should be paying 6½ per cent. The Finance Bill in this Section hits at a company placed in this position, and I cannot really believe it was intended to do so. I feel that this is probably one of those points that must have been missed and I ask the Chief Secretary to look at it most carefully between now and Report.

Sir Eric Fletcher: I can be equally brief. We have sympathy with this proposal. We realise that there may be companies which turn the corner shortly after 1965–66 and so will be in a position to pay arrears of preference dividends, and we agree that if that is the case, they should be enabled to do so without penalty. On the other hand, a general provision might be an incentive to some companies to endeavour to pay off arrears of preference dividends even though the circumstances were such that commercial prudence would not recommend that course.
What I suggest, therefore, is that if the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) withdraws the Amendment, I undertake on behalf of my right hon. Friend the Chancellor that having given the matter sympathetic consideration, we will bring forward on Report an Amendment designed to give effect to the substance of what

the hon. Member has in mind, although, perhaps, couched in somewhat different language, to prevent the possibility of abuse.

Mr. Patrick Jenkin: I shall be incurring the jealousy of some of my right hon. and hon. Friends. I do not quite know how many Amendments I have had to seek leave to withdraw because we have had such favourable and friendly response from the Treasury Bench. In view, however, of what the Minister without Portfolio has said, I am happy to beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Sir Eric Fletcher: I beg to move Amendment No. 750, in page 101, line 16, at the end, to insert:
Provided that, in relation to the cases dealt with by the Schedule (Supplementary provisions about dividend increases in 1965–66) to this Act, this section shall have effect subject to the provisions of that Schedule.
This is the Amendment to which I referred a moment ago and which is a paving Amendment to the new Schedule.

Amendment agreed to.

Sir Eric Fletcher: I beg to move Amendment No. 751, in page 101, line 19, after "dividends", to insert "unless and".
I hope that it will be convenient, Sir Samuel, to take at the same time the next Amendment, No. 752, in line 21.

The Deputy-Chairman: The Deputy-Chairman indicated assent.

Sir Eric Fletcher: I can explain the Amendments shortly and I hope that they will be acceptable to the Committee. They are relieving Amendments and their purpose is to ensure that the standard amount which a company may pay by way of dividends in 1965–66 shall not be lower than the amount of the standard dividends, although it may be higher. In other words, although the standard can be raised, it cannot in any circumstances be reduced. This is, therefore, a relieving Amendment for the benefit of the taxpayer.

Amendment agreed to.

Further Amendment made: in page 101, line 21, leave out from beginning to "the" and insert:
(3) Except in the case of a company not carrying on business earlier than December,


1963, if the amount ascertained in accordance with this subsection is higher than the amount of the standard dividends.—[Sir Eric Fletcher.]

Mr. Diamond: I beg to move Amendment No. 746, in page 101, line 23, to leave out "five" and to insert "seven and a half".

The Deputy-Chairman: I think that with this Amendment we can conveniently discuss Amendment No. 416, in line 23, after "capital", insert:
or, at the option of the company, the capital employed by the company".
and Amendment No. 418, in page 103, line 17, at end insert:
(7) For the purposes of this section the capital employed by a company shall be arrived at by taking the amount by which the value of the company's assets, computed in accordance with the provisions of paragraphs 2 lo 9 of the Eighth Schedule to the Finance Act 1952, exceeds the amount of its liabilities so computed and adding the capital value of the company's investments computed by multiplying by twenty the company's franked investment income for the relevant financial year and deducting the cost of such investment.

Mr. Diamond: Amendment No. 746 quite simply raises the minimum amount which a company may pay by way of dividend in the year 1965–66 without a "forestalling charge" from 5 per cent. of its share capital in 1965 to 7½ per cent. of it. It means that, whatever the level of the profits for 1965, a company may pay out this amount without penalty under the Clause. The previous figure was 5 per cent. Representations were made that that was too low and that 7½ per cent. would be more realistic.

12.30 a.m.

Mr. Higgins: Rather than the Government Amendment, the proposals contained in Amendments No. 416 and 418 should be accepted and enshrined in the Clause, because it seems that the objective is to set a limit above which one can reasonably say that forestalling may have taken place.
The way in which this has been attempted by the Government would not be supported by Dr. Kaldor, because it has been based largely on an accounting convention approach to the whole problem. If we want some criterion of normality between dividends in one period

and another, I suggest that what we want is not an arbitrary accounting convention but an indication of what is the real economic magnitude of the capital involved.
As originally drafted, the Clause was based purely and simply on the idea of share capital, an accounting convention, with an arbitrary figure, originally 5 per cent., to indicate what might be regarded as a normal dividend. The Government have relented somewhat in the severity of the Clause by saying that they will raise from 5 per cent. to 7½ per cent. the amount of dividend, expressed in terms of a percentage over and above the share capital, which they are prepared to accept.
While this represents a change in the amount, it in no way corrects the wrong principle on which the criterion has been based. We on this side of the Committee clearly feel that in this instance one should have a measure of the economic capital involved and, therefore, in Amendments No. 416 and 418 we suggested that we should relate the percentage dividend to the economic capital and give the firm concerned the option of taking this as the measure of the capital employed.
It is true that the Opposition Amendments would not go the whole way to meeting the objection to the criterion being based on economic reality, but had we done that we should have had to give a replacement cost estimate of the capital involved. Nevertheless, there is no doubt that our Amendments are better than that tabled by the Government.
Even if we accept the Government Amendment and increase the percentage to the amount suggested, the judgment as to whether or not there has been forestalling will be arbitrary in its effect. Suppose, for example, that there are two perfectly identical companies making in the initial period the same profits and with the same real capital employed in the business, and then we find a situation in which one has a nominal share capital quite different from that of the other. Then, of course, the basis on which one says that forestalling has occurred will be quite arbitrary. We are left in the situation where the firm with a different nominal capital from the other will have a different criterion applied to it.
This is complete nonsense. We should not simply accept the increase in the percentage which the Government, as a concession, are putting forward but question the whole principle underlying both the Clause and the Government Amendment. I suggest that the Committee supports our proposal, with the Clause being based on an estimate of the capital employed at the option of the firm concerned.

Mr. Ian Lloyd: It will probably have been noticed that in the rehearsal at Covent Garden for the opera that is being put on there in a few days' time, a camel is alleged to have broken loose and stampeded through the scenery. I am sure that many hon. Members who are now becoming more than familiar with the terms of this Bill in the late hours of the night or the early hours of the morning would not be surprised to see camels stampeding out of its pages.
The word "capital" has a more emotive connotation for the politically committed than it has for accountants, and when profit is discussed in the same context the result is often analogous to the effect of lowering the last rod of uranium into a nuclear plant—a great deal of heat is generated. I here recall some remarks of Professor Peter Drucker who addressed the Institute of Management two or three years ago, and made a rather interesting comparison between his visit to Europe just before the war and in 1962. He made the point, which is relevant to our present discussions, that whereas the hostility to profit which was so apparent in Europe before the war had largely disappeared from the Common Market, it remained one of the most significant facts of life in Britain when he visited this country.
Capital and profits are inescapable parts of a capital-using system—in the United Kingdom, in the United States and in the Soviet Union. I was therefore surprised to read in The Times this morning, in an otherwise excellent article on British industry, that:
The return on capital employed by the nationalised industries is low. Since their prime motive is the national interest rather than profit making, this is only to be expected.
The author thinks that they do considerably better than the 10 lowest-yielding private enterprises. From that it would

seem that the logical conclusion is that the lowest-yielding private enterprises have a more developed sense of the public interest than have those nationalised industries. Further it would seem that the highest-yielding private enterprises—which include Granada, A.T.V., Radio Rentals, Butlins and the London Brick Company—would serve the public interest better if they made less profits and paid less tax, and that those enterprises such as B.E.A. which have eliminated the need for subsidy have a much less developed sense of the public interest than those which have not.
The truth, surely, is that without high profit and enterprise in the private sector the country would soon be bankrupt—

Mr. Diamond: As I am to have the privilege of replying to the hon. Gentleman, and as there are many Amendments, I am anxious to know of which Amendments he is speaking. I should like to know, so that I might follow his argument the more closely.

Mr. Lloyd: The Amendment to which I refer is that which deals with capital employed, and I refer particularly to the definition of capital employed; and the remarkable ignorance of the subject which is displayed on the other side.
Without high-profit enterprises the burden imposed by the public sector on the private sector would be substantially greater. Where all is public sector—as exists in semi-paradises and demi-paradises endeared to the hearts of hon. Members opposite—the choice of whether profits are used or not is infinitely more difficult to apply. The profit motive in the U.S.S.R. recognises, if nothing else, that tests of economic efficiency must all be subservient to whether capital employed in one form of economic activity might be more profitably employed in another. We want profit to be employed in both the public and private sectors of the economy which are each consuming wealth.
Clause 78 says that there should be 7½ per cent. of share capital. The first of our Amendments substitutes "capital employed" for "share capital". The reasons for this are quite simple. Issued capital becomes increasingly irrelevant to th true economic circumstances of any enterprise that grows, and it is the wish of hon. Members on both sides of the


Committee that all economic enterprise should grow. A growing enterprise does not only use share capital, but loan capital, supplier's credit and reinvested earnings. All these are sources of capital. Indeed, some of the most successful enterprises—

The Temporary Chairman (Mr. H. Hynd): Order. I am trying to follow the argument of the hon. Member but finding it more difficult to relate what he is saying to any of the three Amendments which we are discussing.

Mr. Lloyd: Amendment No. 416 reads:
after 'capital', insert 'or, at the option of the company, the capital employed by the company'.
I am referring specifically to other types of capital employed by a company, which the Government should recognise in any system which seeks to impose a ratio on the capital of the company. This ratio should not be related solely to the share capital of any such company. I therefore referred to other types of capital.
The test of success is often a decline in the ratio of the share capital compared with other types of capital. Two companies each with a capital employed of £5 million would have these results. Company A would have a share capital of £½ million and reinvested earnings of £4½ million and a standard dividend of 7½ per cent., which would earn £75,500. Company B, with identical resources, would have share capital of £2½ million and reinvested earnings of £2½ million and standard dividend would amount to £187,500. I do not know if it is the deliberate intention of the Chancellor to be arbitrary in his dealing with this point, but it seems that, if it is desired to restrict, it would be difficult to imagine a more arbitrary manner of doing so.
Since investment income comes within the scope of Corporation Tax, the second Amendment seeks to cover cases where the cost of investment might be quite out of line with current investment. One may contrast the cases of two companies with an initial investment each of £100. One, being successful, might produce at 5 per cent. and turn the £100 into £1,000. It would not be correct to assume that the capital employed in that company was £100. By contrast, another company, making less successful investment, might

keep to the figure of £100. The purpose of the Amendment is to enable a distinction which is perfectly legitimate and requires to be made to be in fact made.

12.45 a.m.

Mr. Edward M. Taylor: I speak in support of Amendments Nos. 416 and 418, which I have had the pleasure of signing. I appreciate that hon. Members who have signed these Amendments are hon. Members who are particularly interested in the shipping and shipbuilding industries. We have tabled these Amendments, not because of the particular case of shipping, but because we believe that it affects this industry and others. One thing which has surprised me is how many of the Government's efforts in one direction seem to be frustrating their efforts in others. Throughout the discussion on earlier Clauses it was indicated that the Government were interested in encouraging industries and companies to invest as much as they could—in other words, to provide their capital from their own resources. Many industries and companies have been doing this for many years, but it would seem that this proposal will damage the interests of those industries which finance themselves from ploughed back profits.
This is not a question of detail but of principle. For that reason, we suggest that the relationship should be to capital employed and not simply to ordinary share capital. The relationship to share capital would appear to be very unfair, because there is a very low return on actual capital employed in some of the industries which have ploughed back a good deal of capital and whose profitability at present is not at all great.
I want to give one example of this related to the shipping industry. In 1962, according to the Economist quarterly returns of industrial profits, the profit return on capital actually employed was only 0·4 per cent. for shipping companies. In 1963 this had declined to 0·1 per cent. on the capital actually employed. In 1965 there was an improvement to 2 per cent. on capital employed. This shows, on the one hand, the low rate of profitability in the shipbuilding industry and, on the other hand, the enormous amount of fluctuation there can be from year to year. By all accounts, 1965 will be another year of low profitability for the shipping industry.
In these circumstances, it is unreasonable that we should look for a comparison on the return on share capital, because in the shipping industry, which has a tradition of ploughing back, the peculiar position arises that there is often a very small ordinary share capital but enormous assets employed. For that reason, particularly in this industry but in many other industries where there is a small share capital but a large amount of capital actually employed, because of the tradition of ploughing back, it is very unfair to offer this as one of the alternatives. I appreciate that this is but one of the alternatives and is not the only measure which companies have to adopt in such circumstances. If this is meant as a concession, it should take account of the circumstances of industries. In the case of shipping and other industries, this is in no sense a concession.
To increase it from 5 per cent. to 7½ per cent. is of no assistance to these industries. In Amendment No. 418 we put forward a definition of what we regard as capital employed. We have used as a starting point a definition which was in force for the computation of the excess profits levy but investment income has been included because this comes within the scope of Corporation Tax. Careful consideration should be given to whether the concession to increase it from 5 per cent. to 7½ per cent. will be of any assistance to those industries which have been praised in an indirect way by the suggestion that more industries should plough back capital. This will be of no assistance to industries going through a period of low profitability which have been following this suggestion. For these reasons, I hope that the Amendments Nos. 416 and 418 will be accepted.

Mr. Diamond: As to the general proposal, that instead of share capital one should take capital employed, I am afraid that this is something that I could not recommend because of its difficulty and complexity. It is absolutely essential that a board of directors, when it proposes to declare a dividend, when it reaches its decision about the dividend that it is going to propose to the shareholders, should know exactly what the position is and whether it is a dividend which would be caught under the forestalling provisions or not.
A calculation of capital employed would take a long time indeed. It could not possibly be accurately ascertained until some time after the period when it is proposed to declare the dividend in the ordinary way. But even if the delay were not a major consideration, the complexity is a major consideration and it is not the kind of difficulty that one would want to confront boards with.
As to the effect on the shipping industry, I should have thought the hon. Gentleman would be the first to agree that if we are dealing with an industry which is going through a period of low profitability, as he correctly says, the very fact that it is proposed to increase the minimum from 5 per cent. on capital to 7½ per cent. on capital is dealing very adequately, particularly with an industry which, as the hon. Gentleman says, is going through a period of low profitability and, therefore, of low dividends. To be able to declare a dividend of 7½, per cent. on the capital employed is a good average in today's circumstances and I should not have throught, therefore, that the hon. Gentleman should have any anxiety, as I previously said when we were discussing the shipping industry. My right hon. Friend has clearly demonstrated his anxiety about the industry and is considering with the industry ways and means of assisting it.
The proposal in front of us now to raise the minimum from 5 per cent. to 7½ per cent. without undergoing the risk of a forestalling charge would be absolutely adequate for the shipping industry and the hon. Gentleman has made it clear that that is the purpose of his Amendments. On the ground that they are unnecessary and complex, I do not think that I could recommend that Amendments Nos. 416 and 418 should be accepted by the Committee.

Mr. Higgins: I apologise for delaying the Committee a little longer, but I think we ought to go into this matter a little more deeply than the rather brief answer of the Chief Secretary would suggest. The right hon. Gentleman said that it would be too complex to get closer to the real capital employed by the firm concerned. But surely on a simple balance sheet basis, we can get closer to this


than the arbitrary idea of going on share capital, which is a complete nonsense in this context.
Let us consider two companies where the real capital employed by both of them is £1 million. Let us say that in the standard period they have both been paying a dividend of £100,000 a year but the nominal share capital of one is £100,000 and the other £1 million. Are we seriously to find ourselves in the position where the amount of dividend which will be calculated for forestalling purposes, or in estimating whether it is forestalling or not, should be 7½ per cent per £100,000 in one case and 7½ per cent. of £1 million in the other?
It seems to me that to turn the whole definition on what the share capital happens to be in a particular firm, which after all may depend very much on when the firm was actually formed and what has taken place since, is wholly improper. I agree that we cannot get a perfect measure of economic capital, but we can get a great deal closer than the right hon. Gentleman is proposing.

Mr. Diamond: To reply to the hon. Member for Worthing (Mr. Higgins), I think that what is implicit in what he has said is that the proposal to increase from 5 per cent. to 7½ per cent. is the only proposal to measure the dividend. This is far from being the case. There is a variety of proposals. The hon. Gentleman is saying that share capital is not an accurate method of measuring capital in all circumstances and, therefore, we should use capital employed, which admittedly is a more useful measure of capital for certain purposes. Capital employed and share capital can vary widely as between companies. But what we are discussing here is not all the methods of arriving at a dividend which is free from a forestalling charge.
We are merely proposing that there shall be an irreducible minimum of 7½ per cent. where that suits the company best. If it does not suit the company best, where there has been a long period of standard profits and dividends it may be better to go along on that basis. Where the company adopts a minimum because it is more advantageous than the other basis, we say that that minimum should now be 7½ per cent. where previously it was 5 per cent. To have

a complicated calculation based on capital employed instead of on share capital does not assist anybody at all.

Mr. Barber: The Chief Secretary talks about the proposal put from this side of the Committee as being instead of his own proposal of 7½ per cent., but if we suppose that my hon. Friend's proposal was one additional alternative then, despite its complexities, the directors could ignore it. It would obviously be an advantage in the case cited by my hon. Friend. Would the Chief Secretary therefore consider it?

Mr. Geoffrey Lloyd: The Chief Secretary has mentioned the delay. That has to be taken into account, but there are two methods which are commonly used by analysts in calculating the capital employed. One is concerned with capital employed at the beginning of the financial year and the other with capital employed at the end of that year. I should have thought that to employ the end of the financial year would have fallen within the Chief Secretary's condemnation, but if one took the beginning of the financial year the capital would be there already. It would not suffer from the question of delay and it would at least avoid the gross discrepancy which could arise under the present formula.

Mr. William Clark: We have the extraordinary situation that the Chief Secretary is now doing his best to shield directors from the complexities of capital employed in their business. The right hon. Gentleman would have been better employed in shielding them from the complexities of the Corporation Tax. I am sure that it will be noted with gratitude that at least in the Chief Secretary the directors have a friend in a Socialist Government.
The right hon. Gentleman spoke about the complexity of working out capital employed in a company, but as my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) said, the suggestion now made from this side of the Committee is an option and if it is too complex to work out the directors will not work it out. If it does not pay them to work it out, they will not work it out. It is another alternative. The Chief Secretary says that the increase from 5 per cent. to 7½ per cent. is not


the only advantage or concession in the comparison of dividends and there are other concessions if the company has gone through a fairly lean time.
I was a little doubtful when my hon. Friend the Member for Worthing (Mr. Higgins) cast some aspersions on accounting functions and I was delighted when he resurrected himself from that position. He pointed out that the capital employed in a company is a far better guide than the nominal, the issued share capital, of a company. The Chief Secretary, who has great experience in accountancy matters, knows, as I do, that one can get a rough and ready idea of the capital employed in a business by looking at the balance sheet. If the right hon. Gentleman wishes to deny that, my hon. Friends will accept it from him if he will go part of the way by saying, "All right; take the issued share capital and the reserves". This would give a nearer figure for capital employed in a company, without bothering about revaluation of assets.
1.0 a.m.
The right hon. Gentleman has said that our proposal would be complex and people would not be able to work it out. Let us take the example of two companies starting 10 years ago, each with a capital of £1 million. They make profits over the years. They build up reserves. At 31st December, 1964, company A has accumulated reserves of £500,000. The Chief Secretary will agree that, other things being equal, its capital employed must be at least £1½ million. Company B, with precisely the same profits over the 10 years, has at 31st December, 1964, £1 million share capital and £500,000 worth of reserves, and it capitalises its reserves, at one for two. What is the position then? The 7½ per cent. will operate more advantageously for the company which capitalises its reserves instead of keeping them as reserves. The right hon. Gentleman must take this point.
At some time in the future, a Government will probably introduce legislation following the Jenkins Report. Whether shares of no par value will figure in that one does not know, but if one takes shares of no par value one is using capital employed in the business. This is a valid point, and I ask the right hon. Gentleman to reconsider it. We accept that admini-

stratively it might be difficult for boards of directors to operate. The point about delay is not a runner at all. There is delay anyway in declaring a dividend until one knows the figures. Even without the Bill, there is a certain amount of delay before one declares a dividend, so the right hon. Gentleman could not have been really serious when he said that administratively there would be great difficulty and delay.
I am sure that my hon. Friends are not wedded to the words of their Amendments. With respect to their skill in drafting them, I think that Amendments Nos. 416 and 418 go far too wide. But the spirit behind them ought to be accepted by the Government. If the calculation of capital employed will be too difficult not only for boards of directors to work out but for the Inland Revenue to check, let us take the known reserves of a company, add them to the share capital, and apply the 7½ per cent. to that figure. If the right hon. Gentleman cannot accept the wording but he will, none the less, be sympathetic to its purpose, my right hon. and hon. Friends will be very pleased. We on this side of the Committee are in something of a dilemma on these Amendments. The Chair has called the Government Amendment which raises the rate from 5 to 7½ per cent., but we are procedurally precluded from dividing on the excellent proposals raised by my hon. Friends in their Amendments. We do not think that Government Amendment No. 746, which increased it from 5 to 7½ per cent., goes far enough.
On the other hand, I suppose that half a loaf is better than no loaf, and in this instance in the Committee stage I do not think that any of my right hon. and hon. Friends will want to divide against the Government Amendment. But I reiterate what I said to the Chief Secretary earlier, that there is a valid point here. Nobody wants to avoid tax or to help the tax avoider. But what one should not do is to change the legislation so that some taxpayers get an advantage and some do not. If the Chief Secretary would take the point of capital employed, not necessarily having a very detailed—even if one could get one—computation, but have a look at it and even take into account, for the purpose of computing the 7½ per cent., the share capital plus the known reserves of the company, presumably my right hon.


and hon. Friends would not wish to return to this on Report.

Mr. Simon Wingfield Digby: I wonder whether the Chief Secretary could at least tell the Committee—he has told us very little about it—whether he has studied the memorandum submitted to the Chancellor by the Association of Certified and Corporate Accountants, on page 6 of which it says definitely that it is considered that employed capital would be a far better yardstick than that provided by Clause 78(6)? Is he saying that those people do not know what they are talking about?

Mr. Higgins: I hope that we shall have some reply from the Chief Secretary. I suggest that if we were to accept his Amendments, he might reasonably support ours. Be that as it may, I hope that we shall have a reply. I hope he will agree on the hypothetical example I posed to him, where one has two identical companies of this kind and the only difference is the nominal share capital involved, that the criterion will be totally different in one case from another, and if so, is it not nonsense and should not one accept the point made by my right hon. Friend that one should take account of capital employed?

Mr. Diamond: I am only too happy to reply again if it is thought necessary, if I did not make the position sufficiently clear. The reason why the Chair has selected these Amendments for consideration together is that instead of considering, as one does in the normal way, whether there has been an excessively high dividend by comparing that dividend with some kind of normality, one is at this point saying that, notwithstanding that the comparison with normality may result in an assumption or conclusion that the dividend in question was an excessively high one, if that dividend nevertheless comes within a maximum figure it will be treated as though it is not an excessively high one. If it came within the maximum figure of 5 per cent. on the share capital it would not be considered an excessively high one even though by comparison with previous practice it might be thought at first sight to be so.
But we are altering that to 7½ per cent., and what the Opposition are now

saying, I understand, is that we ought to increase it above 7½ per cent.

Mr. William Clark: No.

Mr. Diamond: Yes. There is no point otherwise. What is being said is that where capital employed is greater than share capital—in the samples given capital employed might be roughly calculated as share capital plus reserves, and that is, therefore, greater than share capital—we should have the larger figure on which to base the 7½ per cent. Had we been thinking of it in those terms, my right hon. Friend would not have proposed an increase from 5 per cent to 7½ per cent. I am sorry, but my right hon. Friend is not prepared to increase the amount still further.
The hon. Member for Dorset, West (Mr. Wingfield Digby) is not too happy about this and quotes his authority. I do not want to raise the temperature of the Committee by answering the specific question he put as to whether I thought anyone knew what they were talking about in this case. I refer him to my hon. Friend who has made comments on this document in the past.
All that the hon. Gentleman is saying is that 7½ per cent. would be even higher, that we should apply it to a basic figure not of share capital but of capital employed if capital employed is the higher. We say that it would be too much. There is no need to have regard to this figure at all. If the company is paying high dividends and always has, then good luck to it. We are only concerned with comparisons, but where comparisons are inapt for one reason or another, a minimum figure is to be allowed and that is to be 7½ per cent. of share capital.

Mr. William Clark: Will the right hon. Gentleman answer the question I put? Supposing a company has capitalised its reserves and gets 7½ per cent. on share capital plus reserves. Does he think it fair that a company which did not capitalise its reserves should get only 7½ per cent. on the lower figure?

Mr. Diamond: The hon. Gentleman gave me an example of a company which had been going for 10 years and had paid dividend every year.

Mr. William Clark: I did not.

Mr. Diamond: I will not contradict the hon. Member, but I thought that he was saying that it had a long history of dividends and that, having that history, particularly for the three years in question, in the basis period it could provide normality against which one could measure dividend in the awkward year, 1965–66, and see whether that dividend was excessive. There was no problem in the example he put.

Mr. Barber: I think that we on this side of the Committee will have to attempt to return to this matter on Report stage because, here again, the right hon. Gentleman's reply has been unsatisfactory. When he replied first of all, he gave two reasons why our proposal was unacceptable. He said, first, that it was too complex and, secondly, that it would involve delay. At that stage there was no suggestion nor any reference to the fact that, in the right hon. Gentleman's mind, also was apparently the consideration that this would involve a greater concession to these companies. This was never even mentioned. Only two reasons were given—that the proposal was too complex and that it would involve delay.
It has been pointed out that what we are suggesting is that our proposal should be an alternative to the proposal of the Chancellor of the Exchequer. Thus, the argument of complexity and delay falls to the ground.

Mr. Diamond: Mr. Diamond indicated dissent.

Mr. Barber: It does. Every company could adopt either the proposal of my hon. Friend the Member for Dorset, West (Mr. Wingfield Digby) or the proposal of the Chancellor.
On the right hon. Gentleman's argument about there being a greater concession, all I will say briefly is that it has been pointed out that the way in which the Chancellor's proposal works is quite arbitrary because, although we see the simplicity of using nominal capital, in fact it is not a realistic method of proceeding in the way capital employed is a realistic proceeding.
I am bound to say, therefore, that the right hon. Gentleman's two answers have not been satisfactory. Nor have they been consistent. We are not able to vote on our Amendments on this occasion. We could vote on the Chancellor's

Amendment but as it is a minor concession in itself we would not wish to divide on it. We shall, therefore, have to return to the subject later.

Amendment agreed to.

1.15 a.m.

Sir Eric Fletcher: I beg to move, Amendment No. 753, in page 101, line 41, to leave out from "1965" to the end of line 43.
This is a paving Amendment to Amendment No. 754.

Amendment agreed to.

Mr. Peter Walker: I beg to move, Amendment No. 661, in page 101, line 43, at the end to insert:
Provided also that where an insurance company which carries on life assurance business and carries out a valuation of its assets and liabilities for the purposes of distribution of profits as at 31st December 1963 or 1965, or any intermediate date, the profits of the last valuation period before 1st January 1966 shall at the option of the company be substituted for profits in the taxable year 1965.

The Temporary Chairman: It has been suggested that with this Amendment we should take Amendment No. 662, in page 102, line 15, at end insert:
Provided that where an insurance company exercises its option under the proviso to subsection (3) above, the standard dividends shall be the average annual dividends paid in the valuation period referred to in such proviso.

Amendment No. 663, in page 102, line 21, at end insert:
Provided that where a company exercises its option under the proviso to subsection (3) above the standard profits in subsection 4 (d) shall be the profits of such proportion of the valuation period preceding that referred to in the proviso to subsection (3) above as corresponds in length to the said valuation period.
and Amendment No. 775, in page 103, line 19, leave out from "amount" to the end of line 27, and insert:
of its profits computed according to the principles of commercial accounting provided always that in comparing one period with another a consistent basis shall be adopted".

Mr. Walker: When at a later hour than this I moved a series of Amendments on life assurance I was pleased to see the Chief Secretary in a good and genial mood towards at least some of the Amendments. I am sure that tonight I shall be supported by the hon. Member for Westhoughton (Mr. J. T. Price),


who is well versed on the subject of life assurance and who made a valuable contribution on earlier Clauses. I am sure that he will quickly realise the purpose of these Amendments and especially No. 661 and No. 662.
I do not think that the Chancellor of the Exchequer would expect the life assurance industry to distribute dividends in such a way as for the Clause to need to be applied to it. Life assurance offices are responsible and are concerned with the long-term interests of the country and policy holders. They operate their finances in a way somewhat different from that of conventional companies in that they do not decide the profits of the company necessarily on a year-by-year basis, but tend to have three or five-year valuations of their various funds, deciding on that valuation what distribution to make to policy holders as profits on their policies and what is available in terms of surplus for distribution to shareholders. Such a valuation may be taken in 1964–65 and as a result of that valuation the dividends for the company would be fixed for the ensuing three or five years in accordance with the distribution for shareholders on the last valuation.
The purpose of the Amendments is to give life offices an option to use a formula for the purposes of the Clause which would be based on the three or five-year valuations which they make and the distributions which they decide as a result thereof. Amendment No. 661 refers to the valuation as such and Amendment No. 662 to the method of the dividends. I should have thought that these were reasonable Amendments which the Government could accept as being appropriate to this important industry.

Sir Eric Fletcher: We appreciate that there are special conditions affecting insurance offices, particularly life assurance offices, and therefore special considerations as to the basis of taxation which should be applicable to them. It is true that most insurance companies engaged in life assurance business adopt the principle of having valuations every three or five years and that on that basis they calculate what proportion of the profits is applicable to the policy holders and what proportion to the shareholders.
We are sympathetic to making an Amendment to the Bill to give insurance companies certain options. I cannot say at this stage that we are disposed to accept the Amendments, but we feel that some provision can be introduced to deal with this matter. We want to consider whether in making concessions for insurance companies we would open the door to other companies in the general field which might claim that they had fixed their dividends for a period of years instead of on an annual basis. But, subject to such qualifying considerations, we will give sympathetic consideration to the matter between now and Report.

Mr. Peter Walker: In view of the assurance of the Minister without Portfolio that he will consider the matter—and we regard the concession as being confined to life offices and have obviously attempted to draft the Amendment accordingly—I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Diamond: I beg to move, Amendment No. 754, in page 101, line 43, at the end to insert:
(3A) In the case of a company not carrying on business earlier than December, 1963, the standard amount shall be whichever is the higher of—

(a) seven and a half per cent. of the company's share capital in the financial year 1965; and
(b) one-half the amount of the company's profits in the financial year 1965.

(3B) Where in the year 1965–66 a company pays a dividend for a period ending in the financial year 1964, being a period of account of not more than twelve months, then if the company so requires subsection (3) above, or in the case of a company not carrying on business earlier than December, 1963, subsection (3A), shall have effect in relation to the company with the company's pofits in that period of account substituted for those in the financial year 1965.

The Temporary Chairman: I suggest that we should discuss at the same time Amendment No. 417, in page 101, line 25, leave out from beginning to first "the" in line 26.

Mr. Diamond: Would it be convenient to discuss also Amendment No. 785, in page 104, line 4, at end add:
(11) This section shall not apply to any dividends paid before the first day of April, 1966, in respect of which the company paying such dividends shows to the satisfaction of the Commissioners that the main purpose, or one of the main purposes of paying such dividends was not the avoidance of the payment of any


income tax in respect of such dividends which would, apart from this subsection, have otherwise been payable by the company.
(12) A company aggrieved by a decision of the Commissioners under the last preceding subsection may appeal to the Special Commissioners and all the provisions of the enactments relating to appeals against assessments to the corporation tax shall have effect with respect to any appeal to the Special Commissioners under this subsection.

The Temporary Chairman: If that is for the convenience of the Committee.

Mr. Diamond: The second and main part of Amendment No. 754 introduces a further option to the company. It provides that where in this relevant year 1965–66 a company pays a dividend for a period of account of not more than 12 months ending in the financial year 1964, it can choose to take the profits of that period of account as a measuring rod to see whether by reference to them an increased dividend in 1965–66 over the standard dividends can be justified. This is in lieu of the profits of the financial year 1965 or the profits of a year ending in the financial year 1965 for which the Clause already provides. I think that this is a reasonable provision. Representations have been made that dividends are frequently declared out of accounts for a period of some considerable time prior to that date of declaration of the dividend. My right hon. Friend feels that it would be right to meet this point and provide this addition option.
We are considering also Amendment No. 417 on which I have no doubt one or other of the hon. Members who has put his name to it would be anxious to speak, and Amendment No. 785 to which I should be only too glad to listen to the arguments that any right hon. or hon. Member wishes to put. But I think it would be convenient if I said to the Committee that the Government have considered this matter very carefully and are very sympathetically disposed towards the final Amendment.
We are dealing with the problem of good faith, whether a dividend declared in a year which has obvious advantages is declared in this particular year as opposed to a later year and whether a dividend declared in this particular awkward year 1965–66 is a dividend which

is reasonable and is a dividend which the company has paid in good faith.
The normal method of arriving at the good faith of the motive is to test it by reference to actions in the past and to see how actions in the period under review compare with past actions and to draw reasonable conclusions from that. That is the basis on which the Clause is drawn. What is suggested under the Amendment in the name of the right hon. Gentleman the Member for Bexley (Mr. Heath) and his right hon. and hon. Friends is that there should be incorporated into this legislation the same kind of test as to motive which has already been incorporated into tax legislation previously, broadly the Profits Tax legislation which hits at avoidance devices.
Broadly equivalent provisions are in Section 28 of the Finance Act, 1960, dealing with the cancellation of tax advantages from certain transactions in securities. In these cases the same point is the question of motive and good faith. It is a difficult concept to try to define and to say what is in the mind of a particular person or board of directors when reaching certain conclusions.
One would not wish to have recourse to this kind of provision in more than that strictly minimum number of cases. But it has to be remembered that what we are dealing with is a particular year only, not a continuing situation—merely what the motive was in declaring a dividend for this particular year; and the Government feel that it is reasonable to have regard to this somewhat difficult kind of provision for that year and therefore wish to bring in a Clause similar to but not in precisely the same words as Amendment No. 785. A number of hon. and right hon. Gentlemen are concerned with possible hard cases, and a provision of the kind which we are discussing, and for which we are indebted to the Opposition, would provide a method of dealing with it.
I therefore hope that this will give an indication to the Committee of the attitude which my right hon. Friend brings to bear on these difficult matters.

Mr. Edward M. Taylor: May I speak briefly in support of Amendment No. 417? It refers to special circumstances


which could arise with particular companies, causing special hardship. I appreciate that such cases could well be covered by Amendment No. 785, which the Chief Secretary is considering favourably, but Amendment No. 417 would remove one more general cause of difficulty. Subsection (3) could help a great deal in cases of difficulty, but all the help which it could give would be removed for a company which has a financial loss in the year under consideration. Some of the companies so affected could well receive no benefit under subsection (3,a).
I am thinking particularly of a company which has been paying steady dividends over the years and then pays a declining dividend because of reduced profitability. It might be paying about 8 per cent. on the actual share capital. This bears no relationship to the actual capital employed by the company because, owing to the financial circumstances at the time it was looking for capital, it may not have raised fresh capital in the usual way. It may be self-financing or it may have obtained money on a fixed interest basis. In such circumstances the company may have no benefit from the provisions of paragraph (3,a).
Subsection (3,b) would help in the majority of such cases to make a reasonable concession but there would be no concession for a company which made a financial loss during the year. These circumstances could arise in a business in which the profits fluctuated a great deal from year to year, and to remove one further anomaly it would help if Amendment No. 417 were accepted. It does not seek to provide a loophole, and I cannot see that any great difficulty would arise from accepting it. It is designed for the special case of a company which tries to stabilise its dividends over the years and which may be paying dividend in excess of 7½ per cent. on the ordinary share capital.

Mr. Wingfield Digby: I hope that the Government will give some attention to Amendment No. 417. In computing the standard amount of dividend, the Amendment provides for the omission of the words
up to the amount of the company's profits in the financial year 1965.
In earlier stages of the Committee we have stressed some features of the ship-

ping industry and the fluctuation to which it has been subjected. We have also stressed its low profitability and the high capital investment there is in the merchant fleet. We have laid stress on the need for the shipping industry to maintain its dividend in order to be in a position to attract new capital for the replacement of the fleet. There was some reference to this point in an article in the Sunday Times last Sunday which said:
The market, I am glad to see, is not getting particularly enchanted about the current improvement in shipping freight rates.
It went on:
One understands, of course, the attraction of shipping shares … there is always the temptation to think at any rate share prices cannot go lower.
It continued:
… no shipping share is a good investment for the man who might want his money out in a hurry.
1.30 a.m.
It therefore follows from these fluctuations that it is important for shipping Companies to maintain high dividends if they can, in bad years as well as in good years. We certainly hope that there are going to be more good years to come. It seems perfectly reasonable that this provision should be made and that they should not lose the advantage of their dividend because all of it is not covered by profits in the current year.
I hope that the Government will look at this point, which is a serious and valid one applying to industries other than the shipping industry. It would apply, for instance, to mining industries where the particular product's world price varies from year to year.

Mr. Lubbock: I should like to follow what the hon. Gentleman the Member for Dorset, West (Mr. Wingfield Digby) has said about the fact that there are two alternative methods. I still think that there is a case here for having another look at the matter. There could be a situation where in the three base years a company may profit to the extent of, say, £1 million, but in either the financial year 1965 or the company's 12 months' accounting period ending in the financial year 1964, which could be used as an alternative under the Chancellor's Amendment, it might have made a profit of only half a million pounds. The directors


might quite justifiably wish to distribute the same amount in dividend as they had done in the three years, in the full knowledge that they were to return to full profitability.
This situation will already be known at the time the dividend is declared and what we are saying is that if, in neither of these two alternatives it can be shown that the profits were as much as in the three best years, this will place a limitation on the amount which could be distributed.
I think that the Amendment has been drafted very clumsily, because if subsection (3) is read from the beginning, the words after
up to the amount of the company's profits in the financial year 1965
which it is proposed to be left out, do not follow at all easily on the words which come before, and one has to read it several times before one can understand what it means. Although I have not put down an Amendment on this point, I should like to suggest to the Chief Secretary that if one deleted those words, as is proposed in Amendment No. 417, and then one put in at the end of subsection (3):
and provided that in no case shall the standard amount exceed the company's profit in the financial year 1965
that is not altering the sense of it at all but merely putting the words at the end of the Clause instead of in the middle and making it much easier to read and understand.

Mr. John Harvey: In view of the difficulties of trying to follow these highly technical matters at this hour of the morning, I hope that I am right in assuming that when the Chief Secretary said that he looked with favour upon Amendment No. 785, this could be very helpful to a number of companies which find themselves in difficulties.
I have in mind, for instance, a company which increased its dividend in 1964 and which, for obvious reasons, wishes to maintain that increase in 1965 but could be heavily penalised for doing so unless the Government take action of the kind which we suggest. It is of the utmost importance that a device should be found whereby a company could select for its standard the highest

amount of dividend paid in any one of the standard years. Would I be right, at this unearthly hour, in assuming that this is the sort of provision that the Chief Secretary was thinking about when he expressed sympathy for the aims of Amendment No. 785?

Mr. Barber: The Chief Secretary said that he was prepared to listen to arguments in support of Amendment No. 785. If one is to have any regard whatsoever to equity in matters of taxation, the Chief Secretary will agree that the Clause is particularly important. Incidentally, the fact that we are having to spend a fair amount of time on the Clause is no fault of the Opposition, because we are dealing with a Clause which the Chancellor either has sought or is seeking to amend in 15 places, as well as adding a new Schedule to enable us to understand its workings.
The purpose of the Clause is obviously to prevent the avoidance of tax. Certainly, so far as it is necessary to safeguard the Revenue, none of my hon. Friends would quarrel with the right hon. Gentleman's proposals. Once again, however, it has been left to the Opposition to explain the practical consequences of the Chancellor's proposals, and in this case they can be put simply.
First, any company which is declining and is, therefore, suffering decreasing profits and smaller dividends will not in general be touched by the Clause. Secondly, however, any company which is forging ahead, expanding its turnover, increasing its profits and providing a commensurate increase in dividends is put in the dock and may well find itself liable for a double dose of taxation under the Clause. I know that there is an element of oversimplification in this, but if one had to sum up in a phrase what the Clause does, in many cases it can be said that it will impose a penalty on success.
Take the simple case of a company on a rising trend of profits over the last three years and assume that the trend continues into this year. In the normal case, where the company is pursuing a reasonable and prudent dividend policy, it will suffer a penalty in respect of its dividend which is paid during the present year, 1965–66.
The trouble arises because the Chancellor of the Exchequer, in an attempt to counter deliberate tax avoidance, which is a perfectly reasonable objective, has so concocted the provisions that in the nature of things he is also bound to penalise innumerable companies which, first, are making no attempt to avoid tax and, secondly, are acting in accordance with sound commercial and financial criteria.
The Chief Secretary has said that he will listen to the arguments. I should like to give him a simple example which was sent to me by a highly respectable and well-known London solicitor. I will not read the whole letter but just one paragraph of it, which states:
I have a company"—
referring to a client—
which was developing and paid no dividends for several years, and then made good profits and paid a dividend in respect of the year 1963. It has made reasonable profits in 1964 and now wishes to pay a dividend in respect of those profits. However, there is no provision enabling repetition of a 1963 dividend to be paid in respect of 1964 without penalty. On the contrary, any dividend in this case in excess of one-third of the dividend paid in respect of 1963 is, in the first instance, treated as involving an excess, and it is not until the results for the financial year 1965–66 are available that it will be known whether in fact a dividend paid now of more than one-third of the last dividend would constitute an excess or not. All this results from the absurd scheme of leaving out of account the calendar year 1964 for purposes of calculation, whereas it is clear that 1964 should in most cases be the most important year determining the average and should indeed in many, perhaps most, cases itself be the yardstick without reference to any previous years.
I do not go the whole way with the writer of that letter in the stress he lays on 1964, because I see the difficulties with which the Government are faced, but the sort of case which this solicitor has in mind is a perfectly reasonable one which should be covered by the legislation; in other words, which should be provided for in such a way that the penalty of additional taxation does not come into the picture. After all, there is nothing that that company is doing which is wrong. One is, therefore, bound to ask why it should risk being penalised for acting in what any normal person would agree to be a perfectly sensible way.
I hope that we will be assured by the right hon. Gentleman—and I will not trouble the Committee with other

examples, although I could give others—that on Report he will introduce a new Clause or Amendment on the lines we suggest in Amendment No. 785. He should by now have been convinced that this is the right way of dealing with the matter and I trust that he will give a categorical assurance that he will amend the Clause.
The sort of cases with which I am concerned—and I will not weary the Committee by giving other examples—are cases where there is no question of unreasonable dividends or tax avoidance. The details of Amendment No. 785 are self-explanatory and I trust that the Chief Secretary agrees that they are fair and reasonable. After all, relief would be given only where the purpose was not to avoid tax and, as can be seen, the onus of establishing the position would be squarely on the shoulders of the company. As to any difficulty in regard to the commissioners not being satisfied or the case going to appeal, I do not believe that it is beyond the Chief Secretary and his advisers to redraft the Amendment in such a way as to achieve substantially our intention. I hope, therefore, that he will go further than he went before and say that on Report he will introduce the necessary Amendment.

Mr. Diamond: I think that I can go further than that. If I have not misunderstood the case put by the right hon. Member for Altrincham and Sale (Mr. Barber)—and one cannot be absolutely sure that after a short reference to a case one is dealing precisely with it—then Amendment No. 754 would meet that very point. The case appeared to mean that the firm in question thought that it had been left out for the year 1964. If the right hon. Gentleman wishes to meet the difficulty stated in the solicitor's letter, he can do so when you put the Question, Dr. King, for as I understand the position, Amendment No. 754 would meet the position precisely.
As to the earlier remarks, the situation is simply that if one has an increasing level of profits and increasing dividends, then having ascertained the average in the basic three years, one adjusts that by reference to the increased profits made in the year for which one says that, having made an increased profit, one wants to declare an increased dividend.


There is no question of penalising the progressive company in any sense at all.
1.45 a.m.
There may be hard cases—cases of the kind which neither he nor I have thought about or counted up in our imagination—where there are difficult circumstances, and hard cases where the sensible way to meet the position is to provide, not a test of average, not a test of achievement of the past and the dividend pattern of the past, but the test of whether or not the dividend declared for the difficult year was a dividend declared in good faith. That will help to solve most of the problems and real difficulties we want to meet, and the Committee is at one in wanting not to encourage, but to prevent tax avoidance. I therefore think that we are meeting that point.
As regard the point which the hon. Gentleman raised, as far as I recollect it now, I do not know whether he appreciated that the average dividends paid in the three basic years, again as a result of Amendments introduced, provide an irreducible minimum standard, so that whatever happens in the year under consideration one does not have to get below that irreducible minimum standard in order to declare a dividend. That being so, I do not think that the points raised by the hon. Gentleman give any real cause for anxiety.
Therefore, having regard to the Amendments that my right hon. Friend has introduced, and is introducing, and to the very clear indication I have given in regard to Amendment No. 785, I hope that all real anxiety has been met, short of encouraging tax avoidance.

Mr. Barber: I hesitate to pursue the matter further, but I understand that the Amendment which the right hon. Gentleman says would have covered the case to which I referred is Amendment No. 754, which deals with the case of the company not carrying on business earlier than December, 1963. If that be the case, it would not have covered the case I mentioned. But I quite agree that it is fruitless to go into individual cases. If the right hon. Gentleman intends to introduce an Amendment on Report to deal with this matter on the lines we have

suggested, I would not wish to pursue the matter any further.

Mr. Lubbock: I must be frightfully dense about all this, but as far as I can see from the Chancellor's Amendment all he has done is to give the company the option of inserting another criterion in subsection (3,b) so that the absolute restriction on the amount of distribution mentioned therein is not limited to the amount of the company's profits in the financial year to 1965, but that at the company's option it can be the amount of the company's profits in its accounting period ending 1964.
But the right hon. Gentleman said that all this did not override the dividends the company made in its past period as a standard, and that, suppose the profits in either of these two accounting periods—either the financial year 1965 or the actual accounting year in 1964—fell below the average dividend, and therefore the base years, the company would still be able to use the three base years as a criterion. He said that in some way Amendment No. 754 achieved that. I am sorry, but I cannot see that, and I should be grateful if the right hon. Gentleman would show how these words override subsection (3, b).

Mr. Diamond: I was referring to the Chancellor's Amendments to lines 19 and 21.

Amendment agreed to.

Mr. Stratton Mills: I beg to move Amendment No. 776, in page 101, line 43, at the end to insert:
(4) Where

(a) in connection with a scheme for the reconstruction of any company or companies or the amalgamation of any companies a company (in this section referred to as "a merger company") has been incorporated in the United Kingdom or has increased its capital with a view to the acquisition either of the undertaking or of not less than 90 per cent. of the issued share capital of one or more existing companies (in this section referred to as "constituent companies") and the consideration for the acquisition has been the issue of shares in the merger company to the constituent company or companies or to the holders of shares in that company or companies; and
(b) the merger company commenced to carry on business or acquired the undertaking of or shares in any constituent company not earlier than 31st December 1963,



the standard amount in respect of the merger company shall be not less than the sum of the standard amounts of the constituent companies computed in accordance with the provisions of subsection (3) hereof.
This is a small, but nevertheless an important, loophole. During the course of an amalgamation a new holding company may come into existence which has acquired the shares or undertakings of a number of trading companies and the provisions of the Clause may bear hardly in the special circumstances shortly after the formation. There may be no standard dividends available for comparison purposes and standard profits will be similarly unavailable as a standard of measurement. The remedy which my hon. Friends and I propose would give the holding company a standard equal to that which would have been the combined standard of the companies it has taken over. In the latter part of the Amendment it will be seen that we have done this by suggesting that:
the standard amount in respect of the merger company shall be not less than the sum of the standard amounts of the constituent companies computed in accordance with the provisions of subsection (3) hereof.

Mr. Higgins: I wish to inquire about consistency. I understand that we are concerned with the standard amount to be taken into account when a merger takes place. In discussion of this earlier we were told that the basis on which standard amount is to be calculated is the dividend percentage in relation to share capital. We were further told that we could not go on a book basis. Would I be wrong in thinking that on a Monopolies Commission case we would take a case on a basis which we have been told cannot be used? Could the Government Front Bench tell us whether there is a degree of consistency in their approach to this problem?

Sir Eric Fletcher: Subject to your Ruling, Dr. King, I think I should be out of order in dealing with various Amendments to the Monopolies and Mergers Bill which we shall be considering on Report on Thursday.
I am prepared to accept the validity of the argument of the hon. Member for Belfast, North (Mr. Stratton Mills). I think he has made a valiant attempt at draftsmanship to meet the point he has in mind, but there are technical defects

in the Amendment. I need not go into them for the reason that my right hon. Friend has indicated that the Government are disposed to accept in principle the object of Amendment No. 785. That Amendment indicates that the instances where avoidance of liability to account for Income Tax is not the purpose or main purpose of admission of a dividend ought not to be caught by the Clause.
If, as I hope, on Report a Government Amendment in the terms of Amendment No. 785 appears, it will effectively cover all the cases of the kind which the hon. Member has in mind. Clearly, mergers of that kind—no doubt there are certain ones in contemplation—may be completed in the near future. In the case of those mergers, it will be apparent that they are not designed for tax avoidance purposes. Therefore, I think they will be effectively covered by the Amendment we have in mind.

Mr. William Clark: We are grateful to the Minister without Portfolio for explaining the point and for saying that Amendment No. 785 will cover this Amendment. The Minister went on to say that it will cover all these cases. Has he any other cases in mind? For example, is he prepared to say now that Amendment No. 785 as drafted by the Government on Report will cover the point of a public company which has just gone public and which said in its prospectus that it would pay 7 per cent. or 8 per cent.? This is a valid point which should be covered by Amendment No. 785. Investment trusts, which pay 90 per cent. of their income in dividends, could also be brought in. Obviously, if their dividends from their investments rise from the standard period to this year or next year, the main object of paying an increased dividend is not for the avoidance of Income Tax.
I should like the Minister without Portfolio's assurance on these points. A company goes public and its prospectus, issued long before the Finance Bill was thought of, says that it will pay a certain dividend. A company might have declared a dividend long before the Budget but payable three months later. The reconstituted Amendment No. 785 should cover the case of a company which is committed to paying a dividend where the declaration of the future dividend


was made before the Budget statement and certainly before the Finance Bill was published.

Sir Eric Fletcher: We are anxious to make progress. I think that I can simplify the discussions on the Clause if I make it perfectly clear, if indeed my right hon. Friend has not already done so, that the Clause is designed to prevent forestalling as a method of tax avoidance. A number of Amendments have been tabled, some by the Opposition, some by my right hon. Friend, to meet special circumstances. We have undertaken to look sympathetically at various cases which have been raised, both by interested parties and by hon. Members in the debate. We have said that we are attracted to the comprehensive nature of Amendment No. 785, because, although we may want to vary its terms, its spirit is to indicate that the Clause does not apply where dividends in excess of the standard dividends have been paid in such a way that the main purpose, or one of the main purposes, was not the avoidance of Income Tax. We think that an Amendment in those terms on Report will meet the legitimate points which have been raised about insurance companies, about mergers, about unit trusts—

2.0 a.m.

Mr. William Clark: And investment trusts.

Sir Eric Fletcher: —and investment trusts. Without committing myself absolutely, I hope the Committee will leave it to us to frame an Amendment on the lines of Amendment No. 785 which I confidently hope will dispose of the various points which have been raised, but if it does not dispose of them it will be open to hon. Members to raise the matter again on Report.

Sir Hugh Lucas-Tooth: There is a point which I thought might have been raised on the Question "That the Clause stand part of the Bill", but, in view of what the Minister without Portfolio has said, perhaps it should be raised now.
Under Section 245 of the Income Tax Act, 1952, the commissioners may deem the income of certain companies to be that of their members where it is considered that sufficient dividends have been

declared. I understand that it is the practice for those representing the companies to negotiate with the special commissioners additional dividends for back years on the footing that the shareholders would accept liability in respect of those back years, notwithstanding that the additional dividends would be declared as soon as the negotiations have been completed. I think this is the type of case which the Minister has in mind. Obviously hardship could arise unless these cases were specially dealt with, and I ask the Minister to have regard to this type of case when considering the generality of cases to which he referred.

Mr. Stratton Mills: I am obliged to the Minister for a very helpful attitude in response to this Amendment, and I accordingly beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendments made: In page 102, line 14, leave out "five" and insert "seven and a half".

In line 20, leave out "ten" and insert "fifteen".

In line 33, leave out from first "period" to end of line 34.—[Sir Eric Fletcher.]

Mr. Diamond: I beg to move Amendment No. 756, in page 103, line 27, at the end to insert:
nor to any investment allowances, initial allowances or balancing charges, to any scientific research allowance in respect of expenditure incurred after 5th November, 1962, or to so much of any annual allowance made at a rate determined under section 38 or 39 of the Finance Act, 1963 (free depreciation in development districts) as exceeds an allowance at a yearly rate of fifteen per cent. of the relevant amount of expenditure".

The Chairman: With this Amendment we can discuss Amendment No. 787, in line 27, at end insert:
Provided that the profits of a company in a development district shall be taken to be its profit after normal capital allowance, excluding special extra depreciation given to companies in development districts.

Mr. Diamond: The purpose of the Amendment is to see that both for comparative purposes and, indeed, for absolute purposes, because both questions arise, the profits are calculated in a way so as to approach the calculation of profits on a commercial basis but still being sufficiently identified with the


method of calculating profits for Profits Tax purposes as not to permit of any vagueness or dubiety.
At present the Clause moves on the basis that profits are calculated as for Profits Tax purposes with certain minor adjustments—franked investment income, directors' remuneration and so on, but, as is well known, these take into account certain non-recurring items which would invalid any proper comparison, such as exceptional capital allowances of a sort which a company would not take into account in computing its commercial profits. The comparison necessary for the purposes of this Clause ought not to be subject to distortion by reference to the incidence of special allowances in this way.

Mr. John Harvey: I hope that the Amendment will be welcomed, but I feel that it could go further. Would it not be possible for the deduction for all annual allowances to be restricted to an annual 15 per cent. of the relevant expenditure and not just 15 per cent. of the allowance for free depreciation in development districts as at present? I make this suggestion because annual allowances over the years have tended to increase. In particular, there was a statutory increase with effect from 5th November, 1962. There is a precedent for maintaining a statutory reduction in the Excess Profits levy legislation in Paragraph 3(1) of the Ninth Schedule of the Finance Act, 1952. Would the Minister give this matter further consideration between now and Report and see whether what is certainly welcome could be made even more acceptable?

Mr. George Younger: We are discussing also Amendment No. 787, which stands in the names of my hon. Friends the Member for Fife, East (Sir J. Gilmour) and myself. While one cannot help welcoming the Amendment which the Chief Secretary has moved as a step in the right direction, after his remarkably woolly explanation of what it was all about I should like to make a strong protest of disapproval from the development districts that the situation ever got into this condition.
I do not know whether the right hon. Gentleman fully realises how damaging to the development districts this Clause was before he produced the Amendment.

It is not just a minor matter of working out how one computes profit before tax. The Clause could have been and is until the Amendment is passed extremely damaging to companies in development districts. I take as a brief and simple example of what the effect of the Clause as it stands would be a company whose standard of dividend as detailed in the Bill is £200,000, whose standard profit for Profits Tax is £500,000, and whose 1965 profit is £700,000.
As the Bill is drafted, there falls to be deducted from that normal depreciation and initial allowance of £50,000 and the special extra depreciation which is applicable to development districts only of £150,000, making a total of £200,000 to be deducted. Therefore, the profit of £700,000 has £200,000 taken off it, leaving a 1965 profit for Profits Tax purposes of £500,000. As the original standard profit was also £500,000, no increase in dividend would be permissible without payment of Income Tax on the increase. But—and this is the point—if the free depreciation for the development districts was not included, the 1965 profit for Profits Tax purposes would be £650,000, that is, £700,000 less only £50,000. Thus, the Bill as drafted is positively disadvantageous to a firm in a development district, which should be receiving benefits rather than be being cut back.
The Amendment removes all that disadvantage except for 15 per cent., but I hope that the right hon. Gentleman will not think me churlish if I still maintain that people in the development districts are fully entitled to be greatly dissatisfied at the way these allowances are being devalued, if only to a lesser degree. They have already had plenty of devaluation of the benefits built up in recent years. The special allowances for development districts introduced in the 1963 Finance Act were welcome on both sides of the House, but we are now beginning to wonder where the sympathies of the present Government really lie. For years, we heard from right hon. and hon. Gentlemen opposite how everything that the Conservative Government did for the development districts was a drop in the ocean and if only they could get power everything would be marvellous. I may be unfair to all hon. and right hon. Members opposite because I have seen only one end of things in recent years, but


all I can say is that this is how we see the situation in Scotland. It is noteworthy that, again, when we are discussing the affairs of the development districts, there is no Scottish Member present opposite. Where is the interest shown before the election? Where are the fine policies and new ideas we were told about? All we have is a devaluation of ideas and policies put into effect by the last Government.
I hope that the right hon. Gentleman will excuse me if I get slightly heated about this, but the attitude of the Government and its supporters looks rather like a confidence trick. For years they led everyone to expect dramatic new ideas and improvements to create further development. At Question Time last week, the Secretary of State for Scotland actually tried to claim credit for improvements which were due to measures introduced by the previous Government which his own Government are now devaluing. The Chief Secretary must think about the development districts again and remove from them even this last disadvantage of the 15 per cent. If he does that, we shall all be very broadminded about it and feel that we have achieved something at least, putting firms in development districts back where they started before the last election.

2.15 a.m.

Mr. Hector Monro: I support my hon. Friend the Member for Ayr (Mr. Younger). I represent a more remote constituency, and there and in Galloway we need an extra special incentive to bring firms to the development districts. I can say from the negotiations that I have had with various firms which might be coming to the development district in my constituency that one of the first questions they ask is whether they will be eligible for the free depreciation rates and what other incentives there will be. These incentives are vital. Firms have been brought to the development districts because of the advantageous tax concessions.
But tonight we hear of a devaluation of these concessions. I cannot emphasise too strongly how unfortunate it is that at this time when we are making our big drive continuing the drive of the late

Government to bring firms to Scotland, we are having a pretty big stumbling block put in our path. The firms which are coming to the remoter development districts need these incentives. It might be easier for them to go to central Scotland which has other advantages in the way of cheaper fuel and so on. For the remoter development districts it is vital to have every possible concession. I warmly support my hon. Friend the Member for Ayr for putting forward the Amendment in the way he has.

Mr. J. Bruce-Gardyne: I also support the Amendment moved by my hon. Friend the Member for Ayr (Mr. Younger). This is a matter of considerable importance, particularly for development districts in Scotland. As usual, we find that there are no representatives of the Scottish Office on the Government Front Bench, and so far as I can see there are no Scottish Labour Members present.

Mr. James Hamilton: The hon. Member should keep his eyes open.

Mr. Bruce-Gardyne: That is an attitude on the part of the Government to which we are getting all too used. It seems deplorable considering that we are discussing an Amendment of such importance to Scotland.
I want to draw the attention of the Chief Secretary to an article by Lord Polwarth in the Investors Chronicle last week in which he said:
Scotland is moving into top gear and is beginning to realise the potential of which many have long known it to be capable.
He went on:
The most immediately effective measure taken in recent years was undoubtedly the introduction in early 1963 of standard grants for plant and machinery and buildings in development districts, coupled with freedom to allow depreciation of plant and machinery against taxation in these districts at any rate chosen by the manufacturer himself. As a development organisation the Scottish Council knows from its own direct experience just how much these financial measures have stimulated the rate at which new industry has flowed into Scotland from other parts of Britain and from overseas, and encouraged expansion by established Scottish firms. During the past two years the recovery of industrial activity throughout Britain has also, of course, had a strong influence.
This is the point. These tax incentives introduced by my right hon. Friend


the Member for Barnet (Mr. Maudling) marked a watershed in our efforts to attract additional industry and deal with the problems of the black spots of underdevelopment and higher levels of unemployment in the development districts. For the first time, we established the principle of differential taxation. Those who believe in the need for extension of this type of differential taxation must regard the decision of the Government to devalue these concessions in a most deplorable light. The meagre concession which the Chancellor has offered us is quite inadequate to our purpose. I hope that the Chief Secretary will look at this matter again and accept the suggestion by my hon. Friend the Member for Ayr and put this on a sensible basis so that we can continue to develop on the grounds laid so fruitfully by my right hon. Friend two years ago.

Sir D. Glover: I apologise for joining in what appears to be a Scottish debate, but Amendment No. 787 does not just apply to Scotland. I am appalled by the fact that not one hon. Member opposite representing the North-East Coast, or the Liverpool area—which is heavily represented on the benches opposite—has contributed to the debate, because it is deplorable that this Clause ever got into the Bill in its present form.
The Chancellor's Amendment goes some way to putting right the absolute enormity of what the Government did. Whether they did it without realising what they were doing, I do not know. It partly removes the disability that the Clause would have brought to development districts, but Amendment No. 787 would have put the development districts back into the position they occupied before this Bill.
One cannot but think of the nauseating hypocrisy of speeches made from this side of the Committee when right hon. and hon. Members opposite were sitting here. Month after month, they attacked what they called the inadequacies of our proposals for development districts. Then they cynically decided to bring in a Clause which would have devastated the growth of the new industries going to those districts. Only at the last minute, as a result of pressure from this side of the Committee and from outside, have the Government brought in an Amend-

ment. But even that still leaves the development districts 15 per cent. worse off than they were.
I hope that, even at this late stage, the Chancellor will accept Amendment No. 787. If he does not, he will find that this 15 per cent. will be a severe disincentive to the growth of business in the development districts, although the Labour Party was committed to the hilt before the election to stimulating growth there. If the Chancellor does not accept Amendment No. 787, the people in the development districts will draw their own conclusions as to whether the Government really mean what they say about the need for expansion in those districts.

Mr. Diamond: Perhaps it will be convenient to reply now and to deal with the problem raised by Amendment No. 787 and with the wider question which hon. Members opposite from Scotland raised by referring to the devaluation of allowances. I hope that hon. Members who have spoken as to the generality of the topic without being tied too closely to the wording of Amendment No. 787 will not mind if I refer them to it a little more closely.
The Amendment seeks to provide that the profits of a company in a development district shall be taken to be its profit after normal capital allowances. The Government Amendment really deals with that problem completely, however, because the figure of 15 per cent. which has been adopted is the minimum normal rate of annual allowance for plant and machinery under the present Income Tax law. What hon. Members opposite are saying is that there are cases where certain plant and machinery qualify for higher allowances than 15 per cent. They therefore want a higher figure.
If they press me, of course I shall be glad to listen to any argument they make, but if they care to work out the conclusions of the Amendments, they will see that my right hon. Friend's Amendment suits their purpose better than their own. With my right hon. Friend's Amendment restricting the figure to 15 per cent., the calculation results in a higher figure of profit, which forms the basis of the percentage for this purpose. The hon. Members from Scotland have demonstrated their interest in their constituencies and their anxiety to make speeches


at this time of the morning, and their inability to comprehend their Amendment. The hon. Member for Ayr (Mr. Younger) said that he hoped that I would not mind his being heated on this topic. I do not mind his being heated, but I would prefer him to be right.
I have considered the matter very carefully. The only result of altering the wording of my right hon. Friend's Amendment to correspond with the wording of the Amendment of hon. Members opposite is to reduce the figure of profit and therefore the figure of dividend which they want to be increased. If they repeat the argument on Report, against the interest of the development districts, then my right hon. Friend will have to give it very careful thought, but I doubt whether they will pursue that line.
The other matter is the complete misunderstanding, which they have repeated, about devaluation of the allowances for the development districts. In case the hon. Member for Ayr and his hon. Friends were not present when we discussed all this, may I say in one sentence that under the present law for Income Tax purposes there is a certain advantage to the business man who takes his business to, and invests in plant in, a development district and that that advantage is increased under Corporation Tax. I repeat "increased".

Mr. William Clark: I am sure that the Chief Secretary will accept that my hon. Friend the Member for Walthamstow, East (Mr. John Harvey) and my hon. Friend the Member for Ormskirk (Sir D. Glover) spoke to the Government Amendment and that that to which my hon. Friend the Member for Ayr (Mr. Younger) spoke has been called with it, but is not to be voted on. What the Chief Secretary has omitted to say and what my hon. Friends wanted to know was why the 15 per cent. had been left in the Government's Amendment. My hon. Friends will no doubt accept that the wording of their Amendment would not provide what they had in mind. Their idea was that free depreciation should be allowed, and we should like to know why it was thought right to leave the figure of 15 per cent. in the Government Amendment.
The Chancellor of the Exchequer told us at the beginning of the afternoon that there were many concessions and then he withdrew the word "concessions" and said that he was proposing to do several things which would cost money. How much will the provisions in Amendment No. 756 cost the Exchequer? Could the Chief Secretary also say how much would be the extra cost if the 15 per cent. were deleted and we had a free depreciation allowance instead? He will appreciate that what my hon. Friends want is free depreciation and, although the right hon. Gentleman is no doubt right in his view of the wording of the Amendment of my hon. Friends, we are concerned with the spirit behind it. In any case, he has still left unanswered the questions of my hon. Friends the Members for Walthamstow, East and Ormskirk. Could he, when replying, give the two costs—the cost of his own Amendment, and the cost if the 15 per cent. were deleted?

2.30 a.m.

Mr. Edward M. Taylor: I should like to comment briefly on the reply which the Chief Secretary gave to the Amendment advanced so ably by my three hon. Friends who represent Scottish constituencies. They made three principal points and I would suggest that none of these has been answered. One of the principal points which my hon. Friend the Member for Ayr (Mr. Younger) argued was that investment allowances had been devalued. We heard the same argument as on previous occasions from the Chief Secretary that, because of the change which has been made in the investment allowances being reduced, the element of preference, if we can call it this, in the development districts has been increased.
We can accept that in one sense this is true. But he must accept that when we reduce investment allowances for the marginal business, which is thinking not of investing in one place or another but whether it will invest at all, the reduction of investment allowances does have an adverse effect upon development areas. If the Chief Secretary were to say that they would abolish all the investment allowances completely, this would on his own argument increase the preference of the development districts. This kind of argument will not wash in Scotland or any other place.
What the right hon. Gentleman is saying is that by reducing one thing they are increasing that element of preference. This is a ludicrous argument and I hope we will not hear it again from him. What we are doing by reducing investment allowances is eliminating a number of potential marginal investments which, instead of investing at all, will decide just not to invest. We are not concerned with the question of preference but with the marginal firm which is deciding whether or not to go ahead. I suggest that, with regard to the special assistance we had for development districts to make certain firms decide to go ahead, they may not now do it at all.
The second question which my hon. Friend the Member for Dumfries (Mr. Munro) raised and which was not answered in any way was why, when this Amendment was known to be coming up and when it was of such interest and concern to Scotland, there was no one on the Front Bench representing the Scottish Office. It may well be argued that this is a question affecting the Treasury—that it is a Treasury Bill. On a question so vital to development districts and to Scotland in particular, we feel that we could at least have had some representation from Scotland on the Government Front Bench. It is noticeable that the great interest and enthusiasm that they shared on this matter in the previous Parliament has not been shown now. We feel particularly annoyed about this when we remember that in the election manifesto of the Scottish Labour Party it was put forward that their proposals would include an increase in the investment allowances and not a reduction.
The final point made, and again not answered, was why on earth this Amendment had proved necessary at all? Were the Government prepared to put forward a Bill without making any provision for relief in respect of these allowances? It seems to us incomprehensible. The only reason I am convinced why they put this forward at all was that the Chief Secretary and his hon. Friends heard that my hon. Friends were going to put forward this Amendment to draw the attention of the Committee and the nation to the fact that the Government were not concerned about the development districts. Until we get an answer to these three points the Chief Secretary has no right

to deal with this Amendment in such an offhand and unkind way.

Mr. Younger: I am sorry to delay the Committee at this late hour, but this is of great importance. We are getting worried in Scotland that there is lack of drive in the real necessity to attract new industry to Scotland. It has been going terribly well over the last year or 18 months but there is a slackening off in the drive for new ideas.
The Chief Secretary did not appreciate the main point which I made, and that was probably my fault for not explaining it properly. These extra depreciation allowances for development districts as introduced in April, 1963, are supposed to be an incentive to persuade people to go to development districts who, for economic reasons, may not otherwise have been prepared to do so. They are supposed to be an attraction. There is an element in the Bill, even after the Chancellor's Amendment, which will make them less attractive.
The person who takes advantage of the extra depreciation allowance will suffer to some extent in these provisions in the computation of profits for this year. There is to be a deduction from his profits of the normal depreciation—that is not in dispute—and also deducted will be the special extra depreciation except for the 15 per cent. mentioned in the Amendment. That is a disincentive. I do not pretend that it is a big disincentive and we in the development districts—and I am delighted to include all other parts of the United Kingdom—will not be satisfied with anything which reduces to any extent the inducement to go to the areas until their problems are entirely solved.

Mr. Diamond: I have always said that the hon. Member is wrong. My right hon. Friend improves the situation, he does not imperil it. What the hon. Member asks me to do is to prejudice the profit ratio of a person carrying on a business in a development district. I do not want to do that.

Mr. Younger: I appreciate that. We shall probably save the time of the Committee if the Chief Secretary agrees to look in HANSARD at the example which I gave and to write to me with an explanation of it. That case shows clearly a loss of £22,500 of the amount of profits. Will he write to me about it?

Mr. Diamond: Mr. Diamond indicated assent.

Amendment agreed to.

Mr. Diamond: I beg to move Amendment No. 757, in page 103, line 27, at the end to insert:
(7A) For purposes of this section the amount of a company's profits for any period when it was an overseas trade corporation shall be computed as if it had never been an overseas trade corporation; and any amount treated by virtue of this section as dividends paid in the year 1966–67 shall be disregarded for purposes of section 26 of the Finance Act 1957 (under which an overseas trade corporation is chargeable to income tax by reference to dividends paid out of exempt trading income), and shall for this purpose be treated as comprising dividends paid later rather than dividends paid earlier".

This Amendment—

Mr. Heath: Is drafting or for clarification or consequential.

Mr. Diamond: As the right hon. Gentleman said, it is drafting or for clarification or consequential. I am reading my notes to see which. [Laughter.] There is nothing to be said against a little candour in the Committee from time to time.
The Amendment corrects two defects in Clause 78 as printed referring to overseas trading corporations. As the Clause was originally drafted the overseas trading corporations were prejudiced to a minimum extent. It was not intended to give them worse treatment under the Clause than other companies. The Amendment remedies the defects. It is an improvement in the situation relating to overseas trading corporations, and I hope that it is acceptable to the Committee.

Mr. Barber: I am grateful to the right hon. Gentleman. He was wise not to trouble to read the next paragraph. We follow it completely.

Amendment agreed to.

Mr. John Peyton: I beg to move Amendment No. 680, in page 103, line 29, after "1965–66" to insert "after 27th April 1965".

The Temporary Chairman (Mr. Grant-Ferris): With this Amendment it would be convenient to take Amendment No. 681, in page 103, line 38, at end insert:
Provided that any capital dividend paid after 27th April 1965 shall be regarded for the

purposes of this subsection as having been paid before that date if—

(i) it was declared by the company in general meeting before that date; or
(ii) it was declared in general meeting after that date but in accordance with a recommendation of the directors and the directors' decision to make that recommendation was, with the authority of the directors, publicly announced before that date; or
(iii) it was paid in accordance with a decision of the directors, and that decision was, with their authority, publicly announced before that date.

Mr. Peyton: I can assure the Committee that there lurks underneath all the verbiage a quite short and simple point and that I hope to be able to move it with considerable brevity. I am encouraged in doing so by this new mood of bountifulness which seems to have overcome the Treasury Bench.
The difficulty here is that it would appear from the Bill as drafted that all capital dividends, no matter when declared, which are paid during 1965–66 are caught. It seems perfectly reasonable to us for the Government to seek to discourage companies from forestalling the provisions of the Bill. We quite accept that, but it is quite another thing, very much more serious and unacceptable, to seek to punish companies for doing something which they already, or were already committed to doing, particularly where that commitment was of a public order from which they could not possibly resile.
The whole purpose of forestalling provisions is to stop a company doing something after a date on which a Government have announced a new policy. For the Government to seek to stop actions which have already been undertaken would be absurd. I feel confident that the Government will look at this and recognise that there is merit and substance in this point which they could not possibly refute. There is no magic in any particular date, the 5th of April or the 6th would be a perfectly convenient alternative to the 27th contained in the Amendments. I hope that the Government will accept this, or undertake to put down some alternative words of their own.

Mr. Diamond: The point is well made and is taken. Both Amendments are accepted.

Mr. Peyton: Perhaps I could say that I am obliged to the Chief Secretary.

Amendment agreed to.

Mr. Diamond: I beg to move Amendment No. 758, in page 103, line 32, after "it" to insert
before that year and".

The Temporary Chairman: I suggest that it will be convenient to discuss, at the same time, Amendment No. 682, in page 103, line 33, after "business", insert
calculated by dividing the aggregate of such dividend so paid since the beginning of 1962–63 and before the end of 1964–65 by the number of years in which such dividends were so paid in that period".

Mr. Diamond: This Amendment relates to the charge of an excessive capital dividend paid in the year 1965–66 over the average capital dividend in an earlier year. The Clause as drafted is not entirely clear, because subsection (8) might be read as providing that the average was to be the average of four years, including 1965–66. This was not the intention and the Amendment makes clear that the average is that of the three years before 1965–66.
This is a simple point and I hope that it will be acceptable to the Committee.

Mr. Peyton: I feel I need hardly mention the Amendment down in my name, because I cannot but believe that the Chief Secretary will not wish to maintain the splendid record he is establishing. The point is a short one and it is concerned with the whole nature of forestalling. If, over the three years which are dealt with in the subsection, a company has only declared a capital dividend once or twice that amount still has to be averaged over the three years. The total amount must be divided by three.
That seems to be unreasonable. If a company has paid a capital dividend in one or two years, it would surely be adequate if we were limited in future to an amount not greater than that paid in any one year. That would seem to me to protect the position which, I understand, the Government wish to establish and I commend it to the Chief Secretary with, I hope, seemly brevity as a point

which deserves his respect and his welcome.

2.45 a.m.

Mr. Nicholas Ridley: I support Amendment No. 682 in the name of my hon. Friend, the Member of Yeovil (Mr. Peyton). As the Bill was drafted, it seemed strange that the year 1965–66 appeared to be included, which, in the case of an excessive capital dividend, would have raised the average, whereas no allowance at all is made for any of the years from 1962–63 to 1964–65. If in any of those years no capital dividend had been paid this would have the effect of putting the average down. Therefore, the Bill seems to be peculiarly self-contradictory. I thank the Chief Secretary for his Amendment, which at least clears up the point concerning 1965–66.
Whatever one may think about capital dividends and whatever may be their future treatment under Clause 43, it must be right that the average for this purpose should be only the average of those capital dividends which have actually been paid and that where there has been either one year blank or two years blank out of the relevant three years, it should be divided by only one or two, as the case may be. I hope that the Chief Secretary has taken the point. It is not a big one, but it is clearly one in which fairness is involved.

Mr. Diamond: I am sorry to say that although the point has been made with acceptable brevity and the argument is clear, it is not one which I can recommend the Committee to accept. First, we have the normal basis of the three years' average where, not capital dividends, but ordinary dividends were concerned, and we have all accepted that by now.
The Opposition now suggest that in the exceptional case of capital dividends, we should have regard not to the average, but that if there were, for example a dividend paid in one of the three years, the one year should equal the average of the three years. In short, that is to say, if a dividend of £1,000 was paid in one year and nothing was paid in the other two years, instead of taking the average as being £333 one should take the average of £1,000. I cannot recommend the Committee to do that,


because I recognise the logic of the argument.
The logic of the argument is that capital dividends are not normal dividends and do not recur with normal frequency. I accept that they are not normal dividends. They should not be treated, therefore, as they have been treated with the special privileges which have attached to them. I should make it clear that we are doing what the Royal Commission recommended many years ago and what, regretfully, previous Governments were never prepared to do: that is, to treat capital dividends in exactly the same way as current dividends or dividends of a normal nature.
It is implicit in our attitude to that that we regard providing an average at all as a reasonable concession. One could take the view, as the Royal Commission recommended, that the payment of a capital dividend is an extraordinary thing. It results in the recipient receiving money free of Income Tax and Surtax. We take the view that the Royal Commission was absolutely right when it stated:
… there is no sufficient ground for treating these 'capital profit' dividends as if their nature was different from that of other dividends".
The majority and minority were agreed about that, and that is what is happening. We say that they should pay tax in the ordinary way; that they should have the basis of the three years drawn in the ordinary way, as for other dividends. I am, therefore, not prepared to recommend the Committee to accept the Amendment.

Mr. Peyton: I do not wish to detain the Committee. I am grateful to the right hon. Gentleman for admitting that there is a point here. Would he undertake to consider, between now and Report, the sort of situation where a fairly large sum of money has been owing to a company for some time and where the repayment of this capital debt has, for one reason or another, been postponed? Would he consider such a situation and the possibility of the company finding itself prejudiced by the provision?

Mr. Diamond: Without entering into a commitment, I will, of course, as a

matter of courtesy, look carefully at what the hon. Gentleman said.

Mr. Ridley: I am not satisfied with the right hon. Gentleman's reply. I agree that capital dividends are not particularly desirable and I have no objection to the proposed treatment of them. The law has hitherto been such that they have been permissible, although the right hon. Gentleman is suggesting that in some way they are not normal dividends. I entirely agree. However, that is no argument for treating them differently.
The Chief Secretary has shown that the more capital dividends are paid the better off will be the firm. If a company is paid only one capital dividend, it is divided by three. If it is paid three such dividends, it is still divided by three. The right hon. Gentleman is, therefore, defeating his own object. The logic of the case rests with my hon. Friend and me. I urge the right hon. Gentleman to consider the matter further.

Amendment agreed to.

Sir Eric Fletcher: I beg to move Amendment No. 759, in line 34, after "shall", to insert "as regards that company".
This Amendment has the same purpose as Amendment No. 749, which the Committee accepted.

Amendment agreed to.

Further Amendment made: In line 38, at end insert:
Provided that any capital dividend paid after 27th April, 1965 shall be regarded for the purposes of this subsection as having been paid before that date if—

(i) it was declared by the company in general meeting before that date; or
(ii) it was declared in general meeting after that date but in accordance with a recommendation of the directors and the directors' decision to make that recommendation was, with the authority of the directors, publicly announced before that date; or
(iii) it was paid in accordance with a decision of the directors, and that decision was, with their authority, publicly announced before that date.—[Mr. Peyton.]

Mr. Patrick Jenkin: I beg to move Amendment No. 778, in line 38, at the end to insert:
(9) Notwithstanding the foregoing provisions of this section the amount paid in dividends by a company shall be deemed not to exceed the standard amount to the extent to which


it does not exceed the aggregate amount of the dividends received by the company in the year 1965–66 from another company or companies resident in the United Kingdom.
I have detected a shortfall in the Treasury's good will during the last few minutes and I hope that in moving this Amendment I will be able to persuade the Government Front Bench to recover it.
This is a perfectly simple and straightforward Amendment which, I am sure, must prove to be acceptable. It deals with the problem of one company which has received dividends from another company which, if passed on to the shareholders of the recipient company may be in excess of the standard, and if the dividends which the paying company has received have exceeded the standard they will have paid the appropriate penalties. In those circumstances, there seems to be no reason why the dividends cannot be passed straight on free of any additional tax at all in the hands of the shareholders.
This is a simple point. It does not arise only in the case of groups and controlling interests but in any case where one company receives dividends from another. If the relief which this Amendment seeks is not given it means that the dividends can be charged to tax twice, or more than twice, as they are passed on. If the dividends which are received by the ultimate company are passed straight on, even if that exceeds the company's own standard contribution, it should not give rise to any additional charge to Income Tax.

Sir Eric Fletcher: I do not think that the hon. Member has made the meaning of his Amendment clear, nor is it clear from the text of the Amendment what he has in mind. There is no question of double taxation here. We are dealing with forestalling, and there is no reason why, in regard to forestalling, receipt of dividends should be treated differently from trading income. There is no question but that the case of dividends paid by one member of a group to another is covered. The hon. Gentleman will appreciate that in the case of dividends paid by subsidiary to parent or vice versa no question arises, but that the same principles relating to forestalling should apply with regard to the whole of the

profits of the company whether derived from trading or whether derived from portfolio investment.
If it has been the practice of the company in the past only to pass on to its shareholders a certain proportion of dividends received, the principle should apply in the current year. There should not be any departure, because in so far as it was a departure it would be just as susceptible of tax avoidance as if an undue part of the trading profits were passed on. So, on this occasion, I would say, with respect to the hon. Gentleman's normal ingenuity, that this Amendment is misconceived, and cannot be accepted.

Mr. William Clark: I would ask the Minister without Portfolio to look yet again at this Amendment. With the greatest respect to the hon. Gentleman, what my hon. Friend seeks to do is absolutely clear. Let us suppose that we have a company which receives a number of dividends from a number of companies. If we take the base year—say, 1963—and assume that company A from the operation of the companies in which it has invested receives gross dividends of £1,000, that sum, for company A, is its standard in 1965–66. Company A, from the same constituent companies, receives income dividends of £1,500. It cannot pass on that £1,500 to the shareholders without incurring the penalty of forestalling. The spirit of the Amendment is that as the constituent companies must have increased their dividends from their base year to the base year we are speaking of, then, already, those constituent companies have suffered the penalty of forestalling. What my hon. Friend tried to make clear is that in a case such as that there would be no double taxation.
3.0 a.m.
It may be that this point is adequately covered by Amendment No. 785, which the Government have agreed to table on Report in an amended form. There is no question here of tax avoidance. Where a company receives dividends from constituent companies and passes them on to its own shareholders, the very fact that in the standard period the dividends were in my example £1,000 and in 1965–66 it receives £1,500, the Government have already collected the extra tax of the


increased dividends of each of the constituent companies.
I am sorry that at this late hour neither my hon. Friend nor I have been able to make ourselves clear, but I assure the Minister that this is a very valid point, although it is a reasonably small one. In order not to delay matters, perhaps he will say that between now and Report he will look at this matter again and say that there is a point which may be covered by the tax avoidance Amendment to replace Amendment No. 785.

Sir Eric Fletcher: I can either deal with the text of the Amendment, or with what the hon. Member for Nottingham, South (Mr. William Clark) said is intended. The text of the Amendment is unacceptable because it goes far beyond what the hon. Member said it is meant to mean. It would enable a company to pay out not only its standard profits but also the whole of the profits derived from portfolio investment. There would be the same element of forestalling in that case as in any other case. If, on the other hand, all that the hon. Member has in mind is circumstances in which there is no tax avoidance, of course the company he has in mind would have the benefit of the comprehensive character of Amendment No. 785 which we intend to put down for Report.

Mr. Patrick Jenkin: In view of the Minister's remarks, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Sir Eric Fletcher: I beg to move Amendment No. 760, in page 104, line 4, at the end to add:
nor shall this section have effect by virtue of section 69 of the Finance Act 1960 in relation to the trustees of a unit trust scheme".
This Amendment is designed to exclude altogether from the Clause any authorised unit trust.

Amendment agreed to.

Motion, made, and Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Barber: No one can say that the debates we have had on this Clause have not been useful. A considerable number of concessions have rightly been

made by Government spokesmen and some of our Amendments have been accepted. In particular, because Amendment No. 785 is to be replaced on Report by a Government Amendment with the same purpose, we shall allow the Clause to pass without very much further discussion.
I wish to ask the Minister without Portfolio one question which troubles me. Am I right in thinking that a close company which does not need to retain profit for development or any current purpose and so is open under the legislation to distribute 60 per cent. of its profits to shareholders, if the trend of profits is rising may nevertheless be caught by Clause 78 and have to pay additional taxation despite the fact that it is forced to pay taxation under Clause 72?
This is a somewhat important matter which could obviously affect many companies. Although I would not wish to debate it now, it seems to me that this is the consequence of Clauses 72 and 78. If so, we would like to consider it.

Mr. Lubbock: May I briefly draw attention to one consequence of the Clause which, I think, was not expected and which I have already drawn to the Chancellor's attention? Subsection (3,b) would appear to allow a pro rata increase in the dividend paid according to the amount by which the profit exceeds the profit in the base years. I am sure that that was the Government's intention, because they say so in terms on page 29 of the White Paper, which talks about
the standard dividends, scaled up by reference to increases in the company's profits".
The amount of the increase in the profit above the standard profit may be nil when the actual profits are much larger than in the base year, because of the operation of subsection (4,d):
the standard profits of a company are whichever is the greater of—

(i) one third of the company's profits for the standard period; and
(ii) fifteen per cent. of the company's share capital in the standard period."

I will try to make the matter clear by giving a simple numerical example. If the profit in the three years of the base period averages £1 million and if the company's share capital is £10 million, then 15 per cent. of the share capital is £1·5 million. Because that is larger than


the profit earned in the base period, that is the standard profit according to the meaning of the Clause. Therefore, supposing that the profits increased to £1·25 million in the year to 31st December, 1965, one would have imagined, reading subsection (3,b) by itself, that the company would be allowed to pay a dividend 25 per cent. greater.
However, because the standard profit is £1·5 million and we are measuring differences between standard profit and the actual for the period, that is a negative amount and no increase in the dividend can be paid. I am sure this was not what the Clause intended. I hope that the Minister will clear this up.

Sir Eric Fletcher: I am sure that the hon. Member for Orpington (Mr. Lubbock) will appreciate that the provision in subsection (4,d,ii) is intended to deal with the case where in the past a company has paid large dividends, despite the fact that its profits were low. He will also appreciate that, without such a provision, an increase in profits in the current year might justify a very large dividend indeed, quite unwarrantably. I appreciate the point he has in mind. I will undertake on behalf of my right hon. Friend to look into the matter between now and Report and see whether there is any way in which that case can be met.
The rather more important point raised by the right hon. Member for Altrincham and Sale (Mr. Barber) was this. He asked whether there was some possibility of some inconsistency, or, indeed, injustice, arising by reason of the fact that the operation of the forestalling provisions in the Clause, coupled with the Clause dealing with close companies, might produce a situation in which, by reason of the fact that a close company had an uplift in profits, which it had to distribute, it might at the same time find itself caught by the deterrent effect of the forestalling provisions. No injustice of that kind would arise.
Under the Amendment on the lines of Amendment No. 785 which we will introduce on Report, the governing factor in considering forestalling will be motive. Therefore, where it was an inevitable distribution in excess of stan-

dard profits, forestalling will not operate and the company will not be penalised.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.

Mr. Callaghan: I think that the Committee will agree that we have made considerable progress since midnight—[Interruption.] Let me put it in arithmetical form. Since midnight we have dealt with nine Amendments, on which there have been substantial debates, and that is good progress by comparison with the earlier hours.
Therefore, I beg to move—what is the form of words?—
That the Chairman do report Progress and ask leave to sit again.
I trust that we shall be able to make equally good progress tomorrow. If we do so there should be no reason why we should not see the glimmering of the dawn on the distant horizon.

Mr. Heath: I think that the Committee will be glad that the Chancellor managed to find the necessary words, after some effort. It would, indeed, be an ominous moment for the Committee if the Chancellor should ever forget the words entirely. In that case we should have to produce them for him.
It is just over three hours since I moved to report Progress in order to ask the Chancellor to state his intentions. I said at that time that were we to embark on Clauses 78 and 79 it would take us most of the night. We have had a concentrated discussion, a large part of which was on Amendments which the Chancellor has put down. The Committee has been greatly helped by the fact that the Chancellor and his colleagues have been able to accept or give undertakings about the remaining Amendments. Yet because of the nature of the points and the complex nature of the Bill, it has taken us over three hours to complete a Clause of the most complicated nature.
As it would take approximately the same time to deal with Clause 79, I think that we are in agreement with the Chancellor that, in view of today's ceremonies, this would be a convenient moment to report Progress.

Mr. William Yates: I would like to agree with the Chancellor, but it is very important that we should make faster progress with the Bill. I am sure he realises that there are many matters about which constituents are asking us, including the land sequestration Bill, the steel Bill and the cheaper mortgages Bill. There are many points on which we are being asked why the Government are not bringing forward their programme as laid down at the General Election.
Therefore, I hoped the Chancellor, rather than knock off now, would have continued at least till six o'clock to enable us to debate some of the things which people are asking us to discuss. I do not know what has happened to the steel Bill, but it is a matter of great anxiety to many of us—

The Temporary Chairman (Mr. Grant-Ferris): Order. The subject which the hon. Gentleman is raising does not arise on this Motion. Will he please keep strictly to the Motion?

Mr. Yates: I quite agree, Mr. Grant-Ferris. All I am suggesting is that we should proceed with our discussion so that there can be more Government time on another occasion to discuss matters which interest our constituents more than this Bill does. It is interesting as it is, and I am glad that discussion has been exact, but I wish the Chancellor to make more progress with the Bill so as to give the House more time to discuss urgent matters, in particular, foreign affairs,

which must be of as much interest to his side of the Committee as it is to ours.

Question put and agreed to.

Committee report Progress; to sit again this day.

SCOTTISH STANDING COMMITTEES

Ordered,
That, for the remainder of the present Session, a second Standing Committee shall be constituted for the consideration of Bills certified by Mr. Speaker as relating exclusively to Scotland and committed to a Standing Committee.

Ordered,
That the said second Committee shall in respect of each Bill allocated to it, consist of not less than twenty nor more than fifty Members to be nominated by the Committee of Selection, of whom not less than twenty Members shall represent Scottish constituencies; and in nominating such Members the Committee of Selection shall have regard to their qualifications and the composition of the House.

Ordered,
That all Bills certified by Mr. Speaker as relating exclusively to Scotland and committed to a Standing Committee shall be distributed between the two Committees by Mr. Speaker.—[Mr. Bowden.]

ADJOURNMENT

Resolved, That this House do now adjourn.—[Mr. Gourlay.]

Adjourned accordingly at sixteen minutes past Three o'clock a.m.